News

Major shareholder JT International Holding B.V. (JTIH) has offered to privatize JT International Bhd (JTI) by acquiring all the remaining shares that it does not already own for a cash offer price of RM7.80/share (20% premium to last traded price of RM6.50 on 28 Mar 2014).

The offer price of RM7.80 was determined after taking into consideration the market prices of the shares prior to the date of announcement as well as JTI’s NTA of RM1.35 and RM1.37 as at 31 Dec 2012 and 31 Dec 2013 respectively.

JTIH currently holds 60.37% of the issued and paid-up share capital of JTI. In brief, JTIH is a wholly-owned subsidiary of JT International Group Holding B.V., which in turn is a whollyowned subsidiary of Japan Tobacco Inc.

JTI’s other substantial shareholders are EPF and KWAP, which its shareholdings stands at 8.13% and 6.84% respectively.

Financial Impacts

None.

Comments

The privatization offer came as a surprise to us as we were not expecting any such announcement in the near term.

However, we advise shareholders to take the offer of RM7.80/share as we do not expect share price to appreciate to the offer price’s level over the near term given the challenging environment for the tobacco industry in 2014.

To recall, JTI’s FY13 results were below expectations arising from lower sales volume and higher-than-expected operating expenses, but were mitigated by higher selling prices.

We continue to foresee sales volume to remain weak throughout the year following the steep hike in selling prices (+14% in end-Sept 2013). Furthermore, consumption is expected to be impacted by continued inflationary pressures and weak consumer sentiment.

Risks

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

Forecasts

Unchanged.

Rating

TRADING BUY

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

We upgrade our recommendation to TRADING BUY (from HOLD) with higher target price of RM7.80 (previously RM6.62) based on the offer price.

Source: Hong Leong Investment Bank Research - 1 Apr 2014