Trouble in smokers' paradise?

Published in Van Zorge Report VOL.X No.7 — April 15, 2008

Soaring tax and excise and public restrictions have left them undeterred. They have also managed to convince the government not to sign nor ratify the international Framework Convention on Tobacco Control. But there is one thing that has been troubling the country’s cigarette producers and it is more difficult to fight — an increasingly unpredictable Mother Nature.

Extreme weather in the past year has ruined clove crops, a key ingredient in the kretek cigarettes favoured by Indonesians. Local producers can presently provide only 70 percent of the total 100,000 tons of cloves a year needed by cigarette factories. As a result, the price of cloves has soared almost 100 percent since December 2007,
from Rp 30,000 a kilogram to Rp 55,000 a kg.

This situation has led to serious problems for the nation’s many small cigarette producers, particularly the about 20 medium-scale producers and the estimated 5000 small home industries in Java alone that supply cigarettes to their local communities.

For these small businesses, importing cloves is out of the question—because distance and the associated costs make the endeavour prohibitive. Indonesia is the largest clove producer in the world after overtaking the island of Zanzibar and the island nation of Madagascar, both in Africa. Singapore has some limited but insignificant stocks, mostly stored by speculators.

Egged on by the smaller players, the larger cigarette companies are now calling for increased government support for the industry and for it to delay imposing the terms of an industry roadmap that is set to remove all government help for the local industry by 2015. At this point, the public health costs for smoking are also supposed to be reflected in increased taxes for cigarettes. If this deadline is not pushed back, the producers now warn, government revenues and tens of thousands of jobs will be at risk.

However, anti-smoking activists note that the clove price hikes have not yet affected the retail prices of the major cigarette brands. This is because the major manufacturers—Gudang Garam, Djarum, H.M. Sampoerna, Bentoel and Noyorono, which together control 80 percent of the market—have sufficient clove stocks to last for another two years.

Of these big tobacco firms, many have been experiencing high rates of growth of late. Last year, Gudang Garam enjoyed 35.23 percent net profit growth from Rp 900 billion in 2006 to Rp 1.22 trillion in 2007. The profit was mainly boosted by a 6.24 percent increase in sales to Rp 21.79 trillion. Meanwhile, the smaller Bentoel saw its net profit increase from Rp 136 billion in 2006 to Rp 167 billion in 2007. Despite the clove price increases, the company says it plans to move ahead with to construct a new factory in Malang, East Java.

The most lacklustre player in terms of recent growth is also one of the nation’s
most profitable by volume —Sampoerna, now owned by industry giant Phillip Morris International tobacco, only booked a 0.03 percent net profit increase over the previous year, but still managed to bank Rp 3 trillion. However, the company’s net sales did drop slightly to Rp 22 trillion in 2007, down 3.28 percent on the previous year.

Labels: Business

Posted by hera at 1:14 AM | Permalinks | Comments

Banking on its future

Published in Van Zorge Report VOL.X N.5-6 — April 1, 2008

Malayan Banking Bhd (Maybank) is gambling on the future of the Indonesian banking but some analysts believe they are paying too high a price. Maybank’s larger than expected bid of US$2.7 billion for PT Bank Internasional Indonesia (BII) saw shares in Malaysia’s biggest bank drop 7.3 percent in one day, its largest tumble in six years.
Analysts agreed.
The reaction of Julian Chua from Citigroup Inc. in Kuala Lumpur was typical. “The price is higher than we assumed for a mediocre franchise [BII],” Chua said late last week, adding he had cut his rating on Maybank stock to “sell” from “buy”.

However, Maybank believes it is backing a winner, at least in the longer term. Last year’s PricewaterhouseCoopers’ report said that by 2050, Indonesia’s banking industry could rival that of France or Italy but with considerably higher returns.

The industry has experienced good growth, in line with the country’s strong economic expansion and surging stock market. The economy grew 6.3 percent in 2007, its biggest increase in more than a decade, while the benchmark stock index increased seven fold in the past six years.

A number of success stories have emerged from the national banking industry, which provides relatively high return-on-equity. Banking credit disbursement was up 25 percent in 2007, compared to 14 percent growth in 2006, while the net profit grew 27.7 percent in 2007 to Rp30 trillion (US$3.27 billion). The profits have been attributed to savings’ interest rate cuts and the growth of small and medium enterprises and consumer credit, which give high margins.

Indonesia’s central bank, meanwhile, is aiming to consolidate the country’s 130 banks, which have total assets of around $200 billion, by promoting mergers and acquisitions.
Maybank agreed to pay $1.5 billion for a 56 percent stake in BII, Indonesia’s sixth-largest bank, and offered $1.2 billion for the remaining stock—4.7 times the book value and almost double the average for Indonesian banks.

Maybank forecast the deal would not boost earnings until the third year, diminishing prospects that the bank would return some of its $11 billion cash on hand to shareholders. The Malaysian lender beat off rivals that included Bank of China Ltd to buy the controlling stake in BII from a group led by Singapore sovereign wealth
fund Temasek Holdings Pte. Temasek, which controls stakes in BII and Bank Danamon, is selling its BII stake to comply with the central bank’s new “single presence policy” that prevents foreign investors from owning more than one bank in Indonesia.

BII’s profit has fallen for the past three years and Temasek has also been accused of not completing knowledge transfer as expected. However, shares in BII have increased four-fold since Temasek bought in in 2003. Maybank’s purchase of BII and its 230 branches will make the Malaysian lender the largest foreign services company in Indonesia. Though streamlining the bank in likely to be a painful process, there is a need for Maybank to acquire growth for the longer term. BII provides such an opportunity.

Analysts believe that the Indonesian banking industry will continue to attract foreign investment. This is good news for Indonesia. The aggressive new players will make the banking industry more professional and competitive. It has also been forecast that it will be more difficult for banks to be able to attract third-party funds. Growing public awareness of stocks, mutual funds or state bonds that give high returns will encourage more people to seek these alternative investment products.

Nevertheless, the outlook for the local banking sector and credit market remains positive, although oil and food price hikes and a stock market slowdown may provide some limited hindrances.

Labels: Business

Posted by hera at 1:38 AM | Permalinks | Comments