PT HM Sampoerna Tbk (HMSP IJ)
Tobacco Sector
A Semester Full of Trials and Tribulations
1H20 Performance: Earnings Hit by Lower Sales and Excise Tax Hike - Below Estimates
HMSP reported 1H20 revenue of IDR44.73 bn, a substantial decrease of 11.8% YoY, and this is reflecting 44.30%/40.33% of Consensus/MNCS estimates. As a result, HMSP’s net profit also decreased by 27.8% YoY to IDR4.89 bn, which is 42.71%/38.20% of Consensus/MNCS estimates. The decline in earnings can be attributed to two things: 1) Lower purchasing power and increased health awareness due to the pandemic; 2) Excise tax stood at IDR28.22 bn, an 11.6% YoY increase. We note that excise tax was 65.85% of the revenue in 1H19, while in 1H20, the excise tax was up at 80.63% of the revenue.
Paying the Premium Price
While HMSP volume in 1H20 fell by 18.2% YoY to 38.5 bn sticks, the majority of the poor performance is a result of the decline in the 2Q only, as they have managed only to sell 18 bn sticks in 2Q20, a significant 27.8% YoY decrease or 12% QoQ decrease. However, HMSP is not the only tobacco company negatively impacted as seen by the change in the whole industry. The total unit sales of the sector in 2Q20 fell by 17.5% YoY to 64 bn sticks. Unfortunately, on top of volume sales, HMSP also saw a decrease in market share. HMSP’s market share fell by 4% YoY from 32.2% in 2Q19 to 28.2% in 2Q20. We see that HMSP’s premium product prices might be the reason. HMSP did not lower its premium prices to maintain its target position as a premium brand cigarette. A downside to this strategy is that many price-sensitive smokers moved to cheaper substitutes, especially amidst the pandemic that decreased the people’s purchasing power.
A Little Relief from the Government
The government is releasing fiscal stimulus for the tobacco industry through the Minister of Finance Regulation No.77/PMK.01/2020. This makes sense because at least 95% of the tax came from the tobacco industry in the past 10 years. The first part of the stimulus is simplifying the tobacco product excise tax that will last until 2024. The initial tax rate structure was divided into 10 layers. This has been simplified to only 5 layers and will be simplified even further to 3 layers in the future. The government believes that this will optimize the state revenue while reducing smoking prevalence in vulnerable ages. On the long run, this will positively impact HMSP because new tax structure will raise taxes for the existing smaller businesses, imposing a higher burden for them to survive. The new tax structure will also create a higher barrier of entry to future companies. The second part of the stimulus involves the relaxation of tax payment from April 9 to June 30, 2020, amounting to IDR27.9 bn shared by 84 factories. Excise tax that was previously paid for sixty days are extended to ninety days. Thus, in the end, the cigarette factory will still have to pay off.
Valuation and Recommendation: HOLD at TP IDR1,650
We revised our call for HMSP to HOLD at TP: IDR1,650 (from BUY at TP: IDR2,500) based on FY20E PE that is 16.48x (nearly –2STD of its 5 years mean). Due to its performance being far below our expectations, we revised our estimates for revenue and net profit by 9%/17% in FY20E. Downside risk to our call: 1) government policy changes, 2) depreciation of IDR, 3) increase costs due to supply chain disruption, 4) decreasing demand for tobacco.
