Results

JTI’s reported 1QFY14 core net profit of RM41m accounts for 36.0% and 32.% of ours and consensus’ full year earnings, respectively.

We deemed this to be in-line as historically for the past two years, JTI’s 1Q core net profit accounts for approximately 32- 37% of its full year earnings.

Deviations

None.

Dividends

None.

Highlights

Revenue: 1QFY14 revenue growth (+4.5% qoq; +11.6% yoy) was largely driven by higher selling prices of cigarettes, which was partially offsets by lower sales volume during the quarter. Do recall that prices were increased twice in FY13 (June and Sept 13).

Earnings: 1QFY14 yoy earnings growth contracted (vs. revenue growth), largely impacted by lower sales volume, weaker product mix, higher marketing investments and higher operating expenditures. However, qoq’s earnings growth outperformed revenue growth on the back of higher volume of business, coupled with costs savings from marketing investments and operating expenditures.

Despite the tough operating environment, JTI managed to grow its market share to 20.4% from 19.6% in 1QFY13. Brand-wise, both Mevius and Winston recorded a market share growth of 0.3ppts to 4.7% and 0.4ppts to 10.4% respectively.

For the remainder of FY14, JTI continue to expect the operating environment to remain extremely challenging, mainly due to the impact of cigarette prices hike and high levels of illicit cigarettes. Nonetheless, the group is pleased with the step-up efforts by the Royal Malaysian Customs in curbing illicit cigarettes.

Risks

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

Forecasts

Unchanged.

Rating

CEASE COVERAGE

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

TP remained unchanged at RM8.20. To date, JTI’s major shareholder now owns 96.05% and the stock will be suspended on 4 June with 2 months duration to compulsorily acquire any remaining shares.

Hence, we take this opportunity to CEASE COVERAGE on the stock as the privatization exercise is now imminent.

Source: Hong Leong Investment Bank Research - 29 May 2014