Gudang Garam ups prices before tax increase

Gudang Garam ups prices before tax increase

Bloomberg, Jakarta

PT Gudang Garam, Indonesia's biggest cigarette maker, raised prices by as much as 2.7 percent this month to cope with a planned tax increase, said a company director.

Indonesia's government on June 8 said it will raise retail cigarette prices by 15 percent from July 1 to boost revenue from tax levies, a move that will likely dent earnings at Gudang Garam and its rivals. The government sets the minimum price at which cigarette makers can sell and uses the price as a benchmark to levy excise duties.

"We decided this month to raise prices just a little," said Heru Budiman in Pasuruan, East Java province. "This is in relation to the government's plan to raise excise tax."

A 20 percent increase in cigarette prices and the consequent rise in excise tax will reduce Gudang Garam's net income by 12 percent, Ben Santoso, an analyst at PT Namalatu Cakrawala Securities, said on May 27, when the government first announced the plan. The government initially said it may increase cigarette prices by between 15 percent and 20 percent.

Indonesia doesn't have age restrictions on the sale of cigarettes and allows smoking in restaurants and bars. More than 69 percent of Indonesian men older than 20 smoke regularly, the World Health Organization (WHO) estimates.

Gudang Garam raised the price of a pack of hand-rolled cigarettes, containing 12 sticks, by 2 percent to Rp 3,750 (39 U.S. cents), while raising the machine-rolled pack by 2.7 percent to Rp 4,800, Budiman said. It raised the average selling price by 5 percent in February, the first increase in more than two years.

The price increase won't affect Gudang Garam's sales in 2005, Budiman said. "We expect we will at least reach the 2004 sales level, which was about 69 billion sticks."

Gudang Garam competes with Altria Group Inc.'s PT H.M. Sampoerna and Djarum Group in the world's fifth-biggest cigarette market.

Philip Morris Intl., a unit of Altria, in May completed its $4.9 billion acquisition of PT H.M. Sampoerna, Indonesia's third- biggest cigarette maker. Altria has said its goal is to overtake Gudang Garam.

Sampoerna, Gudang Garam and Djarum control more than 80 percent of the market in Indonesia, according to Gappri, the industry association.

Gudang Garam shareholders today approved paying Rp 962 billion ($99.7 million), or 54 percent of 2004 net income, as dividends, said President Director Djajusman Surjowijono. Each share will be entitled to a Rp 500 dividend, he said. The payment will be made on Aug. 8.

Gudang Garam's net income fell to Rp 1.79 trillion in 2004, from Rp 1.84 trillion a year earlier. Sales rose to Rp 24.3 trillion, from Rp 23.1 trillion in 2003. Budiman didn't give a net income forecast for 2005.