Results

JTI reported 1HFY13 earnings of RM70.7m, accounting for 57.5% of FY13’s profit. We consider this to be in line with our forecasts as well as consensus as 1H is usually seasonally stronger while 2H is weaker due to potential excise duty hike and/or increase in cigarette prices around budget time. Historically, 1H earnings accounts for ~52-58% of full year forecasts.

Deviations

None.

Dividends

Declared interim dividend of 11 sen/share (1HFY12: 11 sen/share), representing a yield of 1.7%.

Highlights

YTD: JTI achieved revenues of RM635.2m, marginal growth of 1.6% yoy due to the increase in cigarette prices (30 sen hike in June) as well as improved product mix, offsetting the decline in sales volume of 2.7%. Earnings grew further with the help of higher net margins and better product mix which was partially offset by higher marketing investments.

We believe the higher marketing investments were related to its Mevius brand (previously known as Mild Seven) as it was just rebranded in May 2013.

In 1HFY13, JTI achieved a stable market share of 19.7% as compared to 19.5% achieved in the same period last year. Mevius recorded an increase in market share by 0.1ppt to 4.4%.

Fortunately, Winston continued to show growth with improved market share as well to 10% from 9.7% in 1HFY12 despite the continued impact of illegal cigarettes and the sales of cigarettes below the government’s mandated minimum price of RM7/pack.

Illicit whites are still the major concern despite the two continuous declines (Wave 3 ’12 and Wave 1 ’13). Total illicits were down 0.2% in Wave 1 ’13, contributed by the 0.5ppt decline in whites, partially offset by the increase of kreteks by 0.3ppt.

We continue to remain cautious with the outlook of the industry in 2H13 given the potential risk of excise duty hike (which has been absent for two years) as well as the subsequent increase in selling prices.

Risks

• Exceptionally high excise duty 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 with slightly higher TP of RM6.97 based on DCF valuations as we rolled forward our numbers to FY14.

Source: Hong Leong Investment Bank Research - 26 Aug 2013