Wismilak Inti Makmur Braveheart

Company Profile

Wismilak Inti Makmur (WIIM), established in 1994, produces a variety of machine-made clove cigarette (SKM) and hand-rolled clove cigarette (SKT) under various brands. Its anchor brand is Wismilak Diplomat (WD), which has been in existence for more than 20 years and from which it derives lucrative margins. WIIM uses WD as a cash cow to support its mild cigarette business to capture the industry’s growth momentum in the mild segment. Currently, WIIM has two mild cigarette brands – Diplomat Mild (DM), launched in Sept 2012, and Galan Mild, launched in 2010. Its DM brand would be the key earnings growth driver in the long term. The company was listed on Dec 2012.

Highlights

DM on track to meet targets
As we had expected, sales volume for DM products declined in 6M13, no thanks to 5x price hikes YTD to IDR7,560/pack (+16.6%). The DM brand sales volume has declined since the beginning of this year from ~33m sticks/week to ~22m sticks/week at end-June. Assuming the volume of 22m sticks per week is going to continue to persist until yearend, the annualized (52 weeks) volume would reach 1.14bn sticks, which is in line with our FY13 target for DM.

We view WIIM’s mild segment as being on the right path to compete with rival brands such as Clas Mild, U Mild and GG Surya Pro Mild. Note that WIIM’s DM products are mostly priced at IDR8,500/pack at the retail outlets, which means that DM has ample room to hike prices further in 2H13.

Geared up to become tier-1 player
We expect WIIM to become a full tier-1 SKM player from 4Q13, which means it will be subjected to a specific excise tax structure, set based on Government regulations. The key now is WIIM’s ability to increase prices to maximize profit. As WIIM has specific markets throughout Indonesia’s regional areas, we believe it has its own thin slice of pie in the market.

Inelastic demand for cigarette
Despite the escalating inflation pressure in Indonesia, the cigarette industry as a whole should be less impacted as cigarette demand in the country is typically inelastic, especially among rural folks. Demand will remain resilient, although consumers may switch to cheaper brands in bad times. We believe the implementation of the minimum wage ruling should partially offset the erosion of the consumer’s purchasing power due to inflation.