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

- JTI reported 9MFY13 net profit of RM102mil which accounted for 80% of our, and 81% of street’s estimates. We consider this to be broadly within expectations as its 9M earnings typically contribute 80%-86% to full year earnings.

- The group registered slightly higher 9MFY13 earnings (+3% YoY) on the back of flattish revenue of RM942mil. The lacklustre performance was largely due to an estimated 4.4% YoY fall in legitimate cigarette sales volume as well as higher marketing expenses. This was offset by higher cigarette prices (+3% in June 2013) and an improved product mix.

- Note that JTI’s operating expenses are usually back-loaded in line with its parent company’s practice (4Q: ~ 30% of total). That said, management had earlier guided for FY13 expenses to peak in 3Q, in conjunction with the rolling out of its rebranded premium range, Mevius.

- QoQ, net profit declined by a marginal 0.5%, in tandem with a 5.5% drop in turnover as a result of sequentially lower sales volume. We attribute the smaller net profit decline to an encouraging 1.5ppts expansion in EBITDA margin to 15.5%.

- Figures from the Nielsen Retail Audit Report show that JTI’s YTD overall market share has expanded by 0.3ppts to 19.7%, led by both Mevius (+0.1ppt to 4.4%) and Winston (+0.3ppts to 10%).

- Separately, management had declared a single-tier interim dividend of 11 sen/share. YTD, gross DPS amounted to 43 sen, including a 21 sen special announced in March. Stripping out the latter, yields are still at a decent 5%.

- We are keeping our FY13F net profit forecast of RM127mil for now (+26% YoY), implying a 4QFY13 net profit of RM26mil. We expect JTI to enjoy the full impact of the October price hike in the upcoming quarter, barring any significant collapse in legitimate volumes.

- Recall that on Sept 27, a month before the tabling of Budget 2014, the government announced a 3sen/stick (+14%) hike in tobacco excise duty. Following this, the cigarette manufacturers raised pack prices by RM1.50/pack effective Oct 1. This was nearly double the historical price increase-toexcise increase ratio of 1.3x.

- Although cigarette demand is widely considered to be inelastic (and thus a generally efficient method for the government to raise revenue), the presence of illicits (March-May 2013: 33.6%) and ELPCs (4.2% share of market) have made these duty-paid cigarettes more elastic than imagined.

Source: AmeSecurities