Sector Update / Tobacco / Click here for full PDF version
Author(s): Andrianto Saputra ; Nicholas Bryan
- Overall 3Q25 profit came above consensus estimate amid robust GPM improvement coupled with low expectation from consensus.
- With flat excise hike in FY26F, we foresee GPM trend to sustain. We expect /GGRM's FY26F earnings to grow by 26.2/79.3% yoy.
- We upgrade to Overweight rating for the sector with as our top pick due to attractive dividend yield and superior ROE.
3Q25 profit was a beat on the back of robust GPM improvement
3Q25 cigarette revenue declined by -5.5% yoy but was in-line with consensus estimate. Notably, 9M25 cigarette GPM improved by +264bps yoy to 16.1%, driven by a flat excise hike and SKM ASP hike of +4.8% yoy. With the government maintains a flat excise policy for FY26F, we expect the 9M25 GPM trend to sustain in FY26F. Overall, 3Q25 cigarette net profit was above FY25F consensus estimate (at 77.2% - Fig. 5).
Muted ASP adjustment eases volume pressure
Our price survey shows that /GGRM's 9M25 SKM price hike stood at +2.7/+2.9% YTD (vs. 3yr avg of +5.6/4.7% YTD), reflecting a muted price adjustment following the absence of excise hike in FY25. On the other hand, 9M25 sales volume declined by -1.8% yoy (vs. 9M24's -4.7% yoy), much better vs. 's sales volume drop of -11.8% yoy (vs. 9M24's -11.0%), suggesting that the downtrading trend remains more pronounced in 's market segment. Given the unchanged FY26F HJE and current /GGRM's retail price already 14.0/15.7% above 85% HJE threshold, we expect a limited room for further ASP hike in FY26F, aligning with the flat excise outlook. Our sensitivity analysis for /GGRM suggests 8.5/18.7% FY26F earnings changes for every 1% in ASP adjustment (Fig. 7).
Illegal cigarette crackdown presents upside risk for the sector
Our discussion with companies indicated that illegal cigarette market share was at c.20%, equivalent to c.59bn sticks. This suggests a potential upside risk for the industry if the government successfully crackdown on illegal cigarette circulation. Our sensitivity analysis showed that every 5% sales volume increase may increase /GGRM's FY26F earnings by 5.4/9.3% (Fig. 6). With a higher sales volume, it may provide a positive operating leverage for the companies.
Upgrade sector to Overweight from Neutral
In sum, we upgrade our rating to OW for the cigarette sector amid improving fundamental, more favourable policy environment and attractive valuation (sector now trades at 11.0x P/E vs. its 3yr average of 13.5x). In addition, we expect /GGRM's FY26F earnings to grow by 26.2/79.3% yoy, following earnings upgrade post 3Q25 result (link to and note). We prefer given its attractive FY26F dividend yield of 7% and ROE improvement from 24.9% in FY25F to 30.5% in FY26F - Fig. 9.
Sumber : IPS