-  At its AGM yesterday, JT International Bhd (JTI) highlighted that the industry will remain tough in the coming year as it prepares to battle:- (1) the possibility of an excise duty hike; (2)continued sale of illegal cigarettes; and (3) the proliferation of certain local brands being sold below the minimum cigarette price (ELPCs).

-  According to the local dailies, management is not ruling out the possibility of an excise tax hike from the current RM0.22/stick as it has been unchanged since 2010. At that time, duties were raised by 16%, resulting in a double-digit drop in total legitimate industry volume. Our back-of-envelope calculations show that for an every 10 sen rise in prices, there will be a 1.5%-2% reduction in volumes.

-  JTI’s principal brand and leader in the value-for-money (VFM) segment, Winston, continues to battle a declining market share (FY12: 9.8% vs. FY11’s 10%) and has yet to stage a significant volume recovery since the decline in 1Q10.

-  We believe the squeeze in the VFM segment (FY12: -0.4ppt YoY) was due to up-trading activities following the overall positive consumer sentiment as well as higher disposable income from various government handouts. The premium segment recorded a growth of 3ppts in FY12. In addition, the opportunistic retail sale of ELPCs, including brands like Saat, Promax and John which are sold below the minimum cigarette price of RM7/pack, have lured customers away.

-  Overall, JTI’s share of market has been slowly shrinking. The Nielsen Retail Audit Report places JTI’s market share at 19.6% in 2012, 0.3ppts lower than the 19.9% in 2011.

-  On a side note, management has indicated that the rebranding of its full Mild-Seven (premium segment) range to Mevius will be completed by the middle of this year. Our previous concerns over the possibility of it maintaining a positive growth may be unfounded as management has indicated that it continues to be well-received.

-  No change to our HOLD recommendation and fair value of RM7.20/share. For exposure to the tobacco sector, we prefer JTI for its relatively higher yields (FY13F-FY15F: 5%-5.5% vs. Industry peer, BAT’s 4%-4.5%). For FY13F, it has announced a 21 sen special dividend. Our FY13F-FY15F gross DPS forecasts are based on a more sustainable payout ratio of 67% vs FY12’s 200%.

Source: AmeSecurities