Results

Below expectations – JTI’s reported FY13 core net profit of RM120.7m came below expectations, accounting for only 93.8% of our full year forecasts. As compared to street’s estimates, JTI’s FY14 core net profit came in line (96.5%).

Deviations

Higher-than-expected operating expenses.

Dividends

No special dividends declared during the quarter. FY13 total dividends declared sums up to 22 sens/share, representing a payout and yield of 47.7% and 3.5% respectively. This is below our estimates of 34.4 sens/share.

Highlights

Revenue: 4QFY13 revenue growth (+7.7% qoq; +14.1% yoy) was largely driven by higher selling prices of cigarettes, which partially offsets lower sales volume during the quarter. Do recall that prices were increased twice in FY13 (June and Sept).

Earnings: 4QFY13 yoy earnings experienced a steep growth of multiple folds mainly due to the impact of a one-time restructuring charge of RM12.2m in 4QFY12. The charge was related to the closure of the group’s tobacco leave and stemmery operations. Stripping the one-off item, JTI would experienced a net profit growth of 32.9% on the back of improved net margins and better product mix.

Qoq earnings declined despite the growth in revenue due to lower sales volume coupled with significantly higher marketing expenses. We believe the group have carried out multiple marketing efforts due to the tough environment postexcise duty and price hike in Sept.

Having said that, JTI managed to achieve a market share growth of 0.2ppts yoy to 19.6% (from 19.4%). Looking into FY14, the group expects operating environment to remain extremely challenging, primarily due to the hike in excise duty and cigarette prices. In addition, consumption is expected to be impacted by continued inflationary pressures and weak consumer sentiment.

Risks

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

Forecasts

We tweaked our dividend payout forecasts downwards from 70% to 50%, taking into account the potential absence of special dividends in the coming years. As such, FY14-16 EPS are up marginally by 0.5-1.1%.

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, DCF-based TP is reduced to RM6.62 (from RM7.20) as we have also adjusted our 2-years adjusted beta accordingly given that it has changed significantly. Hence, we are downgrading the stock to HOLD.

Source: Hong Leong Investment Bank Research - 26 Feb 2014