Portfolio Watch Indonesia: Cigarette Producer HM Sampoerna
Market share of HM Sampoerna, Indonesia's largest tobacco company, has declined. In the first half of 2017 the company's market share fell to 32.9 percent from 33.4 percent in the same period one year ago. Falling market share is related to the lower production volume of the company as well as falling cigarette consumption of the Indonesian people. HM Sampoerna is controlled by global cigarette giant Philip Morris International.
Based on data from Philip Morris International, total cigarette sales in Indonesia fell nearly 9 percent year-on-year (y/y) to 146.6 billion cigarettes in the first half of 2017, from 160.8 billion sticks in the same period one year earlier. Meanwhile, sales of HM Sampoerna fell about 10 percent (y/y) to 48.2 billion cigarettes over the same period.
These declines were attributed to several factors. Firstly, Philip Morris stated that the rotation of inventory levels fell during the Ramadan month. Secondly, tobacco excises rose again (on top of accelerating headline inflation). Thirdly, the government has implemented several measures aimed at curbing cigarette consumption in an attempt to improve people's health.
After the Indonesian government had already raised tobacco excises by 15 percent in 2016, another hike is expected to come in 2017 (possibly a 10 percent hike). HM Sampoerna therefore needed to raise its prices. Higher prices have resulted in declining sales as it weakens people's purchasing power.
However, falling market share of HM Sampoerna implies that this company is more affected by the unconducive circumstances in Indonesia's tobacco sector than its competitors. For example, HM Sampoerna's market share for hand-rolled kretek cigarettes fell to 17.8 percent in H1-2017 from 18.6 percent in H1-2016, while its market share for machine-rolled white cigarettes fell to 5.5 percent from 6.1 percent over the same period. Only its machine-rolled kretek cigarettes' market share rose from 75.3 percent to 76.7 percent.
Machine-rolled kretek cigarettes are the most important type of cigarette for HM Sampoerna. About 64 percent of the company's total cigarette production consist of these machine-rolled kretek cigarettes in 2016. This figure is higher than the 62.4 percent in the preceding year. This year HM Sampoerna targets to raise the figure to 65 percent. Through the machine-rolled kretek cigarette the company wants to keep dominating the cigarette industry.
Korindo Sekuritas expects HM Sampoerna's sales to rise 9.5 percent (y/y) to IDR 104.5 trillion (approx. USD $7.8 billion) in 2017. This securities firm set its target for HM Sampoerna shares at IDR 4,620 a piece (reflecting a price to earnings ratio of 31.2 times), implying it expects shares to rise. However, so far this year shares of HM Sampoerna have fallen 3.13 percent to IDR 3,710 per share.
Stock Quote HM Sampoerna - HMSP: