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Tobacco stocks’ dip points to industry shake-up
Significant declines in the share prices of Indonesia’s two major cigarette producers, PT Gudang Garam (GGRM) and PT Hanjaya Mandala Sampoerna (HMSP) following the government’s announcement of a steep hike in the tobacco excise has prompted analysts to anticipate an imminent industry shake-up as they downgraded tobacco stocks
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Significant declines in the share prices of Indonesia’s two major cigarette producers, PT Gudang Garam (GGRM) and PT Hanjaya Mandala Sampoerna (HMSP) following the government’s announcement of a steep hike in the tobacco excise has prompted analysts to anticipate an imminent industry shake-up as they downgraded tobacco stocks.
The recent drop in the two companies’ stocks on Monday, the first trading day after the announcement on Friday, has cast a shadow over the tobacco industry in general, which has remained stagnant in the last five years, as demand is expected to weaken.
Shares of Gudang Garam nosedived by 20.64 percent to Rp 54,600 (US$3.89) per share and Sampoerna plummeted by 18.21 percent to Rp 2,290 per share. The companies are two of the heavyweights on the Indonesia Stock Exchange (IDX). With a combined market value of Rp 382.31 trillion, they account for a significant share of the valuation of all firms included in the Jakarta Composite Index (JCI) totaling Rp 7.15 quadrillion.
Finance Minister Sri Mulyani Indrawati announced on Friday that the government had decided to increase the tobacco excise by an average 23 percent and the retail price by 35 percent next year to reduce the prevalence of smoking in the country, among other objectives.
On Wednesday, both stocks got back on their feet to finish the trading day in positive territory. Gudang Garam strengthened by 1.46 percent while Sampoerna jumped 1.72 percent.
“The steep excise hike is especially worrying to the two leading tobacco companies, since the policy will directly contribute to a rise in cigarette prices,” said Jasa Utama Capital Sekuritas analyst Chris Apriliony.
“The cigarette industry has indeed remained stagnant in the last five years. The burgeoning electronic cigarette industry that has been eating away at the market share of conventional cigarettes contributed to the recent dip in tobacco stocks,” he told The Jakarta Post on Tuesday.
He projected that cheaper cigarette brands would also jack up their prices in response to the excise hike. Amid of all this, he said, he believed that premium cigarette brands, such as Gudang Garam and Sampoerna, would come up with less expensive tobacco products in an effort to maintain their customer base.
Stocks of a relatively small tobacco company, PT Bentoel Internasional Investama, showed resistance, rising by around 0.5 percent on Monday to Rp 342 per share and further strengthening by 3.51 percent on Wednesday.
“Following the surprise announcement of a 23 percent excise hike by the government, we now forecast a volume decline for the industry by around 3 percent to 8 percent in the next three fiscal years,” said Bahana Sekuritas analyst Deidy Wijaya.
Cigarette output declined to 332.3 billion pieces last year from 336.4 billion in 2017, according to the Customs and Excise Directorate General.
Deidy downgraded Sampoerna and Gudang Garam stocks to “underperform”, projecting further downslides due to environmental, social and governance (ESG) headwinds and the companies’ currently unfavorable positions in the LQ45 blue chips list and the JCI — which he predicted would limit local investors’ interest in their stocks.
Meanwhile, Danareksa Sekuritas analyst Natalia Sutanto downgraded Gudang Garam’s stocks to “hold” and cut her price target to Rp 63,900 from Rp 88,200. Similarly, Sinarmas Sekurias analyst Wilbert Ham downgraded Gudang Garam from “buy” to “neutral”, reducing the company’s target stock price to Rp 62,800 from Rp 92,800.
Despite the overall grim outlook shared by other analysts, Chris expected the tobacco industry to remain afloat in at least the next several years, as many frequent smokers would still seek out and purchase packs of cigarettes regardless of the price.
“Still, cigarette prices in the country will continue to rise, considering the fact that the cigarette price in Indonesia is low compared to other countries,” he added.
In the long run, however, Chris said, the country’s tobacco industry would gradually lose its prestige and market dominance amid the rise of antismoking activism and increasing health awareness among the public.
