Highlights

There were no major updates / news announced during the analyst briefing which was held yesterday, 26 Feb 2014.

JTI saw a double-digit yoy decline in sales volume of 16.8% to only 5.76m sticks in 4QFY13. The sharp decline was expected by the group given the steep hike in excise duty and selling prices in Sept 2013. JTI’s total sales volume for FY13 was to 2.73bn sticks (-4.2% yoy).

However, it is uncertain whether the volume decline is caused by down-trading and/or legal smokers switching to illicit cigarettes.

Given that FY14 will be a very challenging year for tobacco players, JTI have decided to invest heavily on capex as well as marketing investments (mainly on its two key brands, Mevius and Winston). Despite the decline in FY13 volume under these two brands, its yoy market share have increased.

JTI have added several packaging lines for its products: 1) Mevius Full Flavour and Light have undergone new packaging (launched in Jan ’14) whereby it slides sideways to open (traditionally upwards). A new feature (known as airstream filter) was also added to Mevius Light where it gives smokers a difference sensation (stronger concentration); and 2) Re-packaging for Salem (in Dec ’13) as an initiative to revive the aging brand.

As expected, illicit cigarettes (especially illicit whites) skyrocketed on its last wave (Wave 3) with market share of 38.9%. Do note that this is at the second highest level after Wave 1 in 2009 at 39.7%.

Management gave a heads up that sales volume was way below during the first two months of 2014 as compared to 2013. In our view, sales volume in 1HFY14 is likely to decline further before stabilizing in 2HFY14.

As such, we are maintaining our estimates of a low doubledigit decline in sales volume in 2014. For bottomline, we are expecting a marginal improvement in margins from the steep price hike which would offset the higher operating expenses and depreciation from higher capex as well as lower volume.

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 RM6.62 based on DCF valuation

Source: Hong Leong Investment Bank Research - 27 Feb 2014