HMSP - Pinning hopes on improving economy

• HMSP’s 1H22 net profit plunged 26.3% YoY to Rp3.05tn (-40.8% QoQ in 2Q22) 

• We expect net revenue growth of 9% YoY, EBITDA margin of 10.2% in 2022 

• We reiterate our “BUY” call with 14% upside potential on a 12-month view on strengthened purchasing power and solid B/S 

Dragged down by excise tax hike HMSP's net profit tumbled 26.3% YoY in 1H22 to Rp3.05tn (-40.8% QoQ in 2Q22), accounting for 37.2% of our FY estimate. The lower profit was largely due to higher costs in line with average excise hikes that reached 12% this year and higher raw materials cost by 5.5% in 1H22. This resulted in contracted EBITDA margin from 11.6% in 1H21 to 8.2% in 1H22 (6.3% in 2Q22). Meanwhile, HMSP's net revenue grew 12.3% in 1H22 to Rp53.5tn (+4.5% QoQ in 2Q22), driven by SKM and SKT segments which increased by 12.0% YoY (+5.7% QoQ) and 15.6% YoY (+0.6% QoQ), respectively. Furthermore, the company's finance income plunged 31.9% YoY in 1H22 in the midst of lower interest rate. In addition, net profit margin lowered from 8.7% in 1H21 to 5.7% in 1H22. Balance sheet wise, HMSP managed to maintain its net cash position in 1H22. Bolstered by SKM and SKT segments HMSP's revenue growth was mainly driven by higher average retail price that increased by 8.2% YoY in 1H22 (3.0% QoQ in 2Q22), primarily driven by SKM products namely A mild 16s, Dji Sam Soe Magnum Filter 12 and Dji Sam Soe Magnum Mild 16. Furthermore, HMSP managed to record a sales volume growth of 4.7% YoY to 42.3 billion in 1H22 (2.2% QoQ in 2Q22), lower than the industry's volume growth of 6.6% YoY in 1H22. The overall sales volume increase was mainly boosted by SKM and SKT segments. Meanwhile, SPM segment volume decreased 13.4% YoY in 1H22. The company's SKM high tar products still dominated its overall sales with contribution of 44.8% in 2Q22, slightly higher than previous quarter of 44.5%, followed by SKT products that contributed 21.3% of total sales. HMSP maintained its market share of 27.8% in 2Q22, lower than 27,9% in 2Q21. Striving for product diversification and innovation We expect HMSP's net sales growth of 8% YoY with a downgrade in net profit estimate to Rp7tn this year. HMSP’s sales will be supported by SKM and SKT segments on the back of economic recovery and controllable pandemic situation. Despite better purchasing power as inflation is expected to slow down in the coming quarters, we predict that HMSP will have a limited room to pass excise tax increase on to customers to maintain its market share. This will result in HMSP’s EBITDA margin to further contract to 8.9% in 2022. HMSP continues its product diversification by launching new segment hand-rolled white ciggies (SPT) Marlboro Crafted that is intended for low segment, in addition to Dji Sam Soe Elite 12s, limitedly distributed in Sumatra. Furthermore, the company is on process to establish IQOS manufacturing facilities in Karawang, slated for commercial operation in 4Q22. Reiterate BUY on the back of strong market share in SKM segment We maintain our BUY call with a DCF-based price target of Rp1,050/share. The stock is currently traded at a 2022F PER of 17.4x. We highlight several paramount catalysts including 1) an improvement in consumer spending that will boost tobacco consumption in line with more controllable pandemic situation; 2) strong B/S, providing a room to capture potential investment; 3) more diversified products and product innovation; 4) strong brand equity and 5) relatively stable market share. However, we also note several risks to our recommendation, namely 1) tobacco restriction and raising health awareness; 2) stagnant tobacco market and 3) persistent hike in excise tax.