- We reaffirm our HOLD rating on JT International (JTI) with an unchanged fair value of RM7.20/share.

- According to articles in the local dailies, JTI will be raising the prices of all cigarette brands it manufactures and distributes in Malaysia effective today as a result of a 3 sen/stick (or 14%) hike in excise duty by the Royal Malaysian Customs last week.

- We had anticipated the price hike of RM1.50/pack of 20s by the group following news reports of peer British American Tobacco (BAT) raising its prices by a similar quantum yesterday. We expect the other ‘Big 3’ manufacturer, Philip Morris International (PMI), to also follow suit.

- Note that in the last round of price hikes (June 2013: +3%), JTI and PMI had waited 2 weeks before increasing their prices to be on par with BAT’s although retailers had raised it on the same day (June 3 2013).

- The retail selling prices (RSP) for JTI’s value-for-money (VFM) brands, which includes flagship brand Winston (2Q13: 52% of sales volume), are now RM10.50/pack while its premium lines, namely Mevius, will be sold at RM12.00/pack.

- Although we are cognisant of the fact that tobacco manufacturers typically take the opportunity to nudge their margins up by passing down a quantum higher than the additional excise duty-related costs to offset the subsequent decline in volumes, we were still surprised by the quantum of price increase (+14% for premiums and +17% for VFMs).

- We had earlier expected a minimal mark-up given that this is the third round of price hike in the past year alone (October 2012: +20sen/pack and June 2013: +30/pack) and in view of the high level of illicit cigarettes in the market, especially the illicit whites (May 2013: 33.6% and 23%, respectively).

- A breakdown of the price increase shows that excise dutyrelated price accounted for only 42% of total increase this time, much lower than 90% in 2010 and 70% in 2009. Historically the ratio of price increase to excise increase for a 3 sen/stick excise hike was ~1.3x (this round: 2.5x).

- Given the downward pressure on legal industry volumes (TIV) following the jump in RSP, we have revised downwards our legal TIV growth assumption to -5% for FY13F and -6% for FY14F (from 0% to +1% previously).

- As our calculations indicate that the additional price would be sufficient to compensate for the decline in sales volumes, our FY13F-FY14F net profit forecasts for the group remain relatively unchanged (+0% to +1%). We see EBIT margins inching up by ~1ppt over the next 2 years.

- Yields for the group remain fairly attractive at ~5.3% for FY13FFY14F (excluding the special dividend of 21 sen in FY13F).

Source: AmeSecurities