Highlights

There were no major updates / news announced during the analyst briefing which was held last Friday, 22 Nov 2013.

Industry data showed that JTI once again outperformed the industry by recording a slight yoy drop in volume of 0.2% for 9MFY13 vs. total legal industry decline of 2.1%.

The decline in both JTI and industry was partly mitigated by the heavy-loading during the 3-day period (27-29 Sept 2013), whereby manufacturers and retailers were informed on the excise duty hike on 27 Sept and prices will only be increased effective 30 Sept 2013.

JTI’s outperformance was largely driven by its premium brand, Mevius (previously known as Mild Seven). The brand experiences a 7.8% growth in 9MFY13 vs. same period last year, offsetting the declines of its remaining brands.

For 4QFY13, the quarter could post mixed results for two reasons: 1) heavy-loading of inventories by retailers during 27-29 Sept 2013; and 2) negative impact on sales volume post-increase in excise duty and selling prices of cigarettes.

Depreciation costs almost doubled yoy during the quarter due to its heavy capex, in which JTI invested on additional machineries (for packaging line) as replacements. Going forward, the group will be focusing more on innovation aspects rather than production given that the legal domestic market has saturated and has been trending downwards.

JTI’s inventories on local tobacco leaves are reducing and we believe it would finish by 1QFY14. Thereafter, JTI will be manufacturing its cigarettes with 100% imported leaves (lower costs), hence lowering its costs and expanding its margins.

As for the GST (6%), we are informed that it would be replacing JTI’s current sales tax (5%). Thus, the additional 1% would only involve minimal costs absorption or price hike.

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 RM7.05 based on DCF valuation.

Source: Hong Leong Investment Bank Research - 25 Nov 2013