Results

JTI reported 9MFY13 earnings of RM101.5m, accounting for 82.6% of FY13’s profit (82.0% of consensus estimates).

We consider this in line as 9M usually takes up approx. 80- 85% of its full year earnings with 4Q being the weakest.

Deviations

None.

Dividends

Declared interim dividend of 11 sen/share, bringing YTD DPS to 22 sen, representing a payout and yield of 56.7% and 3.4% respectively.

We are maintaining our dividend payout forecast of 70% as we expected JTI to pay a lumpy final dividend in 4Q.

Highlights

Comparing qoq, yoy and YTD, all three periods experience a decline in revenue due to lower sales volume, partially offset by higher cigarette prices (+30 sen/pack in June and +RM1.50/pack in Sept).

Bottomline, qoq and yoy both recorded a decline at a smaller quantum due to higher depreciation costs incurred. Reasons behind the spike will be clarified in the analyst briefing held later. YTD, bottomline grew at 3% from lower operating expenditures.

In 9MFY13, the group achieved a market share growth of 0.3ppts to 19.7% yoy, contributed by Mevius (+0.1ppt to 4.4%) and Winston (+0.3ppts to 10%).

We would not be surprised if the reading for illicit cigarettes has skyrocketed in the next wave as we believe the hefty price hike in Sept could prompt smokers turning to the black market given the significant price differential.

We continue to remain cautious on the outlook of the industry in 4Q as well as in FY14 as we foresee industry’s sales volume will continue to decline on the back of the hefty hike in excise duty which resulted in a 14.3-16.7% increase in selling prices (end-Sept).

Risks

• Exceptionally high excise duty 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 with unchanged TP of RM7.05 based on DCF valuations.

Source: Hong Leong Investment Bank Research - 22 Nov 2013