Results

JTI’s 1QFY13 revenue came in line with our forecasts, accounting for 24% of FY13’s revenue. However, profit of RM39.75m was slightly above expectations, taking up 34.5% and 32.3% of ours and consensus’ estimates respectively. Historically, 1Qresults normally contributed 28-30% of full year earnings.

Deviations

Wider-than-expected margins.

Highlights

Yoy: Lower sales volume during the quarter resulted in the decline in revenue by 3.6%. However, earnings picked up with growth of 5.3% on the back of improved net margins and better product mix.

Qoq: Revenue grew 6.9% from higher sales volume recorded. Profit grew 13x the back of lower marketing investments and operating expenditures incurred during the quarter. Also, profit in 4QFY12 was at a lower base due to an EI of RM12.2m resulting from the cessation of its leaf and stemmery operations. Excluding EI, net profit grew by 2.6x.

JTI achieved a broadly stable market share of 19.7% as compared to 19.8% in 1QFY12.

Mild Seven have officially been renamed to Mevius beginning May 2013, and the product recorded an increase in market share of 0.1 ppt to 4.5%. Winston has finally showed improvement, with increased market share by 0.1 ppt to 9.9% after experiencing continuous decline for more than 4 consecutive quarters.

The group is expecting a challenging operating environment throughout 2013 due to the continued impact of the sale of illegal cigarettes and the impact from certain local brands selling below the Government mandated minimum pricing.

However, we believe JTI would remain competitive and continue its efforts in growing market share, especially under its Global Flagship Brands, namely Mevius and Winston.

Risks

• Exceptionally high excise duty hike.
• Increase in illicit trade volume.
• Weaker-than-expected TIV.
• Regulation tightening.

Forecasts

We tweaked JTI’s sales volume slightly downwards to account for the cautious outlook but widen its overall margins for FY13-15 by 1 ppt, benefiting from more costs savings going forward. As a result, FY13-15 forecasts were raised by 3.5-6.7%

Rating

HOLD

• Positives – (1) High dividend yield stocks; (2) Countercyclical share price pattern; (3) Oligopoly industry; and (4) Resilient earnings and low capex requirements.
• Negatives – (1) Highly regulated industry; (2) Potential excise duty hike; (3) High level of illicit cigarettes in the market; and (4) Prices already reflect fundamentals.

Valuation

• Post-earnings revision and adjustment to beta, TP increased by 1.6% to RM6.95 from RM6.84, based on DCF valuations. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 22 May 2013