COMPANY ANALYSIS: GUDANG GARAM TBK IN 2016

History

Gudang garam Tbk was established on 1958 at Kediri regency by Mr. Surya Wonowidjojo. In 1979, the company built its first cigarette manufacturing machines in Kediri regency.  Currently, the company has been led by Mr. Susilo wonowidjojo.

Referred its annual report, the parent company is Suryaduta Investama. The company is also operating in other segments such as entertainment, transportation and investment.

Facilities

Gudang garam has maintained good relationship with stake holder including the tobacco and clove farmers. There have been more than 4000 farmers who supported raw material for the company.  Some portion of raw material was imported from oversea because of the prolonged wet season which affected harvest of tobacco and clove. The domestic farmers supplying for the company are located across archipelago.

Gudang Garam has two main factories, first facility is located at Kediri regency and second manufacture facility is in Gempol, Pasuruan regency. In 2016 the company was not extending its production facilities, the capacity was capable for producing cigarette as demand in kretek market. Other manufacture facilities are located at Sumenep and Karang anyar.

The company’s products are various kretek cigarettes low tar nicotine variant (mild and light) and traditional hand rolled kretek. The corporation has 4 major subsidiaries, they are Surya pamenang, Surya Madistrindo, Surya air and galaxy prime and Graha surya media .

Change in strategy, turning from contender to dodger

In 2017, its subsidiaries, karyadibya mahardhika and surya mustika nusantara have been acquired by Japan tobacco. 100 % shares of those subsidiaries have already owned by the japans company. Gudang garam followed strategy of its competitor in indonesia such as Djarum and Sampoerna. Djarum has already acquired by Galaher group and Sampoerna has been owned by Phillip morris international. 

Accordance to domestic electronic newspaper, kontan.co.id, those companies were purchased at USD 667 millions.

The acquisition is done due to its market share in 2016 which decreased compared to its market share in 2015. Its market share in 2015 and 2016 were 21.5 % and 20.8 % consecutively. Besides, the excise tax has been higher compared to tax in the last five years

Accordance to Wikipedia, Japanese government owns 33.35 % shares of Japan tobacco. It also has more than 66 % market share in Japan. Japan tobacco also has interest in Gallaher group.

Gudang garam possibly intends to increase its export through the acquisition as market share indonesia tend to drop as government increases excise tax once at every years. Many small tobacco factories indonesia has been closed due to higher excise tax.  On other hand, it also change its strategy in competing with multinational company in clove cigarette market in indonesia such as phillip morris and Gallaher group and also Japan Tobacco. Wismilak, another domestic competitor has also been controlled by Japan Tobacco. 

If we look at the matrix at above, we could conclude that Gudang Garam tbk acted as a dodger now.  The company sold its subsidiaries to multinational company to reduce competition to multinational company, at least the company is not competing to Japan tobacco and its affiliated company now.

The global pressure from phillip morris and Gallaher are high in tight market. The competition has become more strict as government regulation for tobacco industry is not friendly. It reflected on dropped market share in 2016 compared to 2015.

Gudang Garam would like to keep its position as market leader and it collaborated to Japan tobacco to get more access in global market value chain.

Macro Indicator

The economic growth in 2016 was batter than in 2015, it stood at 5.01 %, and it was higher than in 2015 which were at around 4.9 %. In line with Indonesia’s current account, it increased from us -17.51 billion to us -16.77 billion. The export of goods and service was improved, it reflected on its foreign exchange currency; those were IDR 13,864 and IDR 13,503 in 2015 and 2016, consecutively.  

Market share

Based on euromonitor in august 2016, the company had 28.8 % market share in local clove cigarette market. Meanwhile HM Sampoerno and PMI (Phillip morris international) had higher market share compared to Gudang Garam, it had 35.3 % market share in 2016. Another big competitor, Djarum was having 12.4 % market share at indonesia.

In Global market, gudang garam owned 1.2 % market share in 2015. The market leader of global market share for tobacco product was China National Tobacco Corporation with 42 % market share. China is the biggest market for tobacco in the world.

The market share of cigarette reflected as the following graph

In 2016, basically Gudang Garam has already been as market leader in clove cigarette market in indonesia if we split phillip morris international’s product from HM sampoerna brands. Since phillip morris international has acquired HM sampoerna, their product collaboration has been as market leader in the past three years.

Government Regulation for clove cigarette kretek and Vape

Government has already been implementing strict regulation for tobacco industry. The reason is protecting people to consume cigarette which was causing damage to people health. Many diseases are caused by tobacco.

In july 2018, government will also charge excise tax for vape product. government argues that vape damaged people health. It caused damage in lungs. The tax will be 57 percent equal to clove cigarette product.

Vape is possibly a substitute product for clove cigarette. it is unlike cigarette which is using fire to burn clove blended tobacco, Vape is utilizing vaporization of liquid tobacco which is heated by battery.

The excise tax is charged to tobacco product which is done based on regulation of UU no. 39 tahun 2007.

Company financial analysis

Revenue

Revenue of the company in 2016 slightly increased more than 8 % compared to revenue in 2015. The biggest contributor of revenue was contributed by SKM (sigaret kretek mesin) product which was sold at 68,620 million sticks of cigarette. Whereas, its SKT (sigaret kretek tangan) was sold at 8456 million sticks of cigarette. those numbers slightly dropped. The revenue incremental occurred due to higher pricing to skt and skm products.

The higher excise tax from government pushed the company to increase its product prices.

Profitability

Net income before tax in 2016 slightly increased than net income before tax in 2015, it occurred as revenue increased in 2016. The company also reduced its interest expense and it increased its net profit before tax. The utility of short term debt has been decreased.

The higher revenue and higher gross margin in 2016 compared to 2015 were also increasing EBITDA in 2016.

Liquidity

Current ratio in 2016 was higher than current ration in 2015. It increased from 1.77 to 1.94 in 2015 and 2016, subsequently. The ability to pay short term liability was improved.

The cash to cash cycle (DR + DI – DP) in 2016 was also improved compared to cash to cash cycle in 2015 from 246 days to 239 days. The company was able to make shorter its business operation.

Leverage

The leverage ratio (total asset to equity) decreased from 1.67 to 1.59. The current asset decreased especially its cash and cash equivalent. The company reduced its utility of short term loan. It paid some portion of its short term debt in 2016. Meanwhile the equity portion rose as the company was able to increase its revenue and reduce its cost.

Capital expenditure

In 2016, the company allocated its internal fund to purchased fixed asset amounted to more than idr 2 trillion. It purchased spare part of machine for production, raw material for building development and information technology product.

Credit Risk

Moody’s rating agency has given credit risk score for Gudang garam tbk at 6 of 1-10 score. The credit risk score is made based on company’s balance sheet and input from capital market. It is categorized in medium level.

Conclusion

Gudang garam turned its strategy from contender to dodger; it sold its subsidiary to Japan tobacco. As a result of that Gudang garam brand was also sold by Japan Tobacco at oversea. The new strategy is expected to increase its global market share at oversea. Djarum group claimed that it have more than 70 % market share of clove cigarette product at over sea.

Djarum group has collaborated to Gallaher group which is based on UK. Gudang Garam is expected to be able to access distribution chain at oversea such USA, Europe and other asian countries. 

GGRM 2015

Company analysis

In 2015 the company attained positive growth in its revenue, although its export revenue declined. Cigarette is the main product of the company, in 2015 its contribution is more than 98 %, and another type of product is paperboard, entertainment and etc. the machine made cigarette is still dominated as its biggest contributor of its revenue, which is 90 % of total sales. Hand rolled clove cigarette is only contributing 8.3 % of total revenue.  

Accordance to annual report, the volume of revenue declined as the economic growth in 2015 was not performed as expectation. The volume of the revenue in 2015 is 78.6 billion bars; it is less than the volume in 2014 which is at 80.6 billion bars. Besides that, the volume of the revenue declined due to weakened purchasing power of consumer. The 7.9 % growth in revenue is occurred due to higher price of product.

In 2104 the company established surya abadi semesta, subsidiary which is expected producing e-cigarette in the future. In 2015 it was not commencing its commercial activities yet. Almost of the kretek market declined in its volume of sales except SKM full flavor which rose 8.9 %. Government has made tight policy for cigarette industry either in its excise duty or in its advertising policy.

In 2015 the company launched new product, Surya Pro Mild brand. This product may be as the rejuvenation of Surya Pro series which its life cycle may be possibly at maturity. It consider to not add its capacity of production yet at recent. 

GUDANG GARAM TBK - GGRM

Industry

13 % of total monthly average expenditure

Based on Badan Pusat Statistic the third biggest monthly average expenditure is tobacco and betel commodity which is 13 % of total expenditure.  That means many Indonesian people allocate their income to purchase tobacco product such cigarette in large number despite its expensive price. Mean while government tends to increase its excise duty for cigarette product and prevent television to display picture of cigarette either for advertising or another show.

The largest expenditure is prepared food and beverage commodity, the second is cereal such as rice. In conclusion, cigarette industry which produce its product such Machine made clove cigarette, Hand-rolled cigarette and klobot clove cigarette is still promising as the demand of Machine made still grows despite of the decline in demand of Hand Made clove.

10 % of excise duty for Regional cigarette tax

The regional tax for cigarette has been implemented and the industry of cigarette is imposed higher cost in selling their product. The last increase of excise duty cost was at 2013, it is possible that the excise duty will be more expensive at the next year.

Gudang Garam - GGRM

Company established in 1971 in Kediri, east java. But their commercial activity actually has been started since 1958 as proprietorship in Kediri, east java, Indonesia.

The biggest share holder of the company is surya duta investama which owns about 69 % of total share. The company sells their product both to domestic and to abroad. Accordance to annual report their market share in 2013 is 20.06 percent of total market.  Although its market share decreases from 30 % in 2005 to 20.6 % in 2013, the total revenue is still increase annually. The market size may expand with larger size in Indonesia and the industry player may grow at every year.

In 2013, revenue increase 13 % up compared to revenue in 2012. The key driver of revenue growth was at Machine made clove cigarette product, which was 88 %of total revenue in 2013. The domestic revenue was still dominated with 95.8 percent of total revenue in 2013.

In 2013 the company could increase its gross margin from about 18.8 % to about 19%. The cost may be reduced by the usage of machine clove and larger economic scale. Compared to HM sampoerna, its margin in the last five years is lower than HM sampoerna.

In 2013 the activity ratios commonly were steady although there were slightly increase in days payable and its day’s inventory.

Another competitor, bentoel, plans to reduce the number of factory and the number of worker. They plan to reduce plants from eleven to about four in order to decrease operating costs as there was an increase in excise duty in 2013.

The market size is smaller than last year as the demand of handmade clove cigarette declined. The trend of consumption in cigarette product is changing, the recent time people preferred to buy Machine Made Clove cigarette than Hand rolled clove cigarette. And the consumer is more care about health.

Links

http://bisnis.liputan6.com/read/2054087/dua-pabrik-rokok-sampoerna-tutup-negara-kehilangan-rp-479-miliar

source: BPS august 2014

Source : Annual Report 2013

Source : Annual Report 2013

source : average last 5 years - reuters

Source : Annual Report 2013

Source : Annual Report 2013

Source : Annual Report 2013