News

Major shareholder has revised its offer to privatize JTI to RM8.20/share (from initial offer of RM7.80/share). The closing date has been set on 5 June 2015, up to 5pm (Malaysian time).

Shareholders who have accepted the initial offer at RM7.80 will be entitled to receive the revised cash consideration of RM8.20/share under the revised offer.

Up to 21 May 2014, JTI has received 11.37% of the outstanding shares, in addition to its own stake of 60.37%. JTI has also received the following irrevocable undertakings to accept the revised offer from: 1) EPF (8.13%); 2) KWAP (6.84%); 3) Great Eastern Life Insurance (4.72%); and 4) PNB (3.94%).

Financial Impacts

None.

Comments

The revised offer of RM8.20/share came as another positive surprise to us as there was no dissatisfaction on the initial offer price.

As such, we continue to advise shareholders to take the offer at the revised price as we do not expect any significant boost in earnings in the coming quarters. Moreover, with the above irrevocable undertakings to accept the revised offer, the major shareholder would have breached the 95% mark, making the privatization imminent.

Recall that 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.

JTI is expected to release its 1QFY14 results on 28 May 2014 and followed by an analyst briefing on 30 May 2014.

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) Price already reflects fundamentals.

Valuation

We upgrade JTI’s target price to RM8.20 based on the revised offer price announced. However, we are downgrading our recommendation to HOLD from TRADING BUY given that the total return have lessened to less than HLIB’s 10% benchmark based on its latest closing price.

Source: Hong Leong Investment Bank Research - 22 May 2014