- We maintain our HOLD recommendation on JT International (JTI) with an unchanged fair value of RM7.20/share following its analyst briefing yesterday.

- Based on JTI’s distributor-to-trade (DTT) data, total legitimate industry volumes (TIV) were down 5% YoY in 1QFY13 to 3.3bil sticks, mainly because of the 20 sen hike in ex-factory prices back in October 2012. JTI’s overall share of market (SoM) currently stands at 21.7% (QoQ: +0.7ppts; YoY: +0.2ppts).

- Following the weak 1QFY13 legal volume numbers, management believes FY13F will be a tough year for the ‘Big 3’ cigarette manufacturers and volume growth will be much lower than FY12’s 5% which came on the back of status quo excise duties and hence, prices.

- As we had noted in our report yesterday, Winston, JTI’s flagship brand and leader in the VFM segment, had managed to grow its market share despite volumes slipping 1.4% QoQ. However, unlike the earlier 9.9% SoM (reported based on AC Nielsen figures which measures consumption data from a sample of outlets), JTI’s internal DTT figures showed a rise of 0.3ppt to an 11.2% SoM.

- JTI’s sole premium brand, Mevius (rebranded from Mild Seven in May 2013) continued its strong performance of double digit growth in the past 3 years. Volumes were up 5% both QoQ and YoY. DTTbased market share showed a 0.3ppts expansion to 6%. To ensure the retention of its franchise, management said that it had conducted retailer programmes on how to communicate the change to consumers as well as inserted information highlighting the change in its packs.

- While acknowledging that its operating expenses are always backloaded in line with its parent company’s practice (4Q: ~30% of total), management said that FY13F will see highest spending in 3Q given the 2Q rolling out of Mevius. Capex for this year will also be higher given the commissioning of new lines (FY12: RM33mil).

- Recall that in FY12, JTI had also ceased its practice of procuring leaves from domestic growers, which are the second most expensive in the world. However, with about 12-18 months’ inventory on-hand, we believe any cost savings and margin expansions could only come in, at the earliest, late-FY14.

- At present, consignment manufacturing (similar to BAT’s older toll manufacturing system) comprises 50% of JTI’s production volumes. Despite the lower margins (only earn on the conversion portion), JTI had agreed to take on production for scale as well as to increase its capacity utilisation (~70% to 80%). As JTI does not procure the inventory, no additional risks are taken on and no cash is tied up.

- On the regulatory front, management admitted that the appointment of a new health minister creates a lot of uncertainty especially on the level of engagement and commitment to carry through previous threats including that of plain packaging and size of the pictorial health warning (PHW).

Source: AmeSecurities