-  We maintain our HOLD recommendation on JT International (JTI), with an unchanged DCF-based fair value of RM7.20/share.

-  JTI’s interim net profit of RM71mil came in within expectations, accounting for 56% of our, and consensus’, estimates. Note that JTI’s earnings are typically frontloaded, making up 55%-60% of full-year profits.

-  Compared to the preceding quarter, turnover increased by 5% on the back of higher cigarette sales volume while net profit declined by 22%. This was mainly attributable to higher A&P expenses during the quarter, which resulted in a -4.2ppts QoQ EBITDA margin compression to 14%.

-  We believe the higher expenses are related to the rolling out of Mevius, JTI’s premium brand which was formerly known as Mild Seven. Spending is expected to peak in 3QFY13.

-  On a YoY basis, 1HFY13 turnover and net profit grew by 2% and 5%, respectively. Higher cigarette prices (+3% per pack from June) and better product mix had helped mitigate the 2.7% YoY fall in sales volume and higher marketing costs. Overall, EBITDA margin for 1HFY13 improved by 0.8ppts.

-  According to AC Nielsen Retail Audit, overall market share for the group expanded by a marginal 0.2ppts to 19.7% driven by the momentum from Winston’s turnaround which began in 1QFY13. JTI’s flagship VFM segment label had increased its market share to 10% (+0.3ppts YoY) while Mevius’s share of market is now at 4.4% (+0.1ppt YoY).

-  Both these expansions appear to be in line with the robust growth in the premium (+1.7ppts YoY) and VFM (+0.1ppt YoY) segments following a reduction in illegal sales activities of cigarettes sold below the mandated minimum price (ELPCs: -1.9ppts YoY) and illicits (33.6% in the latest March-May survey vs 33.8% previously).

-  Management has proposed a single-tier interim dividend of 11 sen/share, bringing total dividends declared thus far to 32 sen/share (including a special of 21 sen). Ex-date has been fixed for Sept 26, while entitlement is on Sept 30.

-  Looking ahead, we expect earnings in the next few quarters to be distorted by pre-Budget stocking and destocking activities, as well as lower consumption levels during the July fasting month.

-  No changes to our earnings forecasts at this juncture. Our fair value implies a PE of 15x FY13F earnings.

Source: AmeSecurities