Highlights

There were no major updates / news announced during the analyst briefing which was held yesterday, 26 Aug 2013.

Industry data showed that JTI once again outperformed the industry by recording a slight yoy drop in volume of 0.3% 1HFY13 vs. total legal industry decline of 2.5%.

The outperformance was largely driven by JTI’s premium brand, Mevius (previously known as Mild Seven). The brand experiences a 9.9% growth in 1HFY13 vs. same period last year, offsetting the slight decline under VFM segment.

As expected, the higher marketing expenses incurred were from the rebranding exercise for Mevius (name change) and management guided that the costs will also be incurred in the following quarter (3QFY13).

Looking into 3QFY13, the quarter could post mixed results given several reasons: 1) July being the Ramadan month whereby volume normally shows some contraction; 2) August to normalize as operations are back to normal; and 3) September to be the month of pre-budget speculation on potential excise duty hike and subsequent increase in cigarettes’ average selling prices.

We remain cautious with the potential hike in excise duty given the absence for two years. Management is hoping for a moderate hike with expectation of approximately 30 sen/pack.

Capex for FY13-14 is likely to balloon given the group’s intention to have new line installation. However, nothing was disclosed about the installation (on whether a new brand line or repackaging of existing brands).

JTI’s current inventories on local tobacco leaves are sufficient to supply the group for the next 6-7 months. Thereafter, they would be manufacturing cigarettes solely on imported leaves. We believe the group will meticulously ensure the blend does not differ much from the initial taste/flavor.

Regarding the industry talks on Trans-Pacific Partnership (TPP) Agreement, JTI hopes the industry would be included as it would provide the group better and wider access to trade opportunities outside the Asean region and eventually improve JTI’s total exports.

Risks

• Exceptionally higher ED hike.
• Increase in illicit trade volume.
• Weaker-than-expected TIV.
• Regulation tightening.

Forecasts

Unchanged.

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

Maintain HOLD and target price of RM6.97 based on DCF valuation.

Source: Hong Leong Investment Bank Research - 27 Aug 2013