JTI registered FY11 earnings of RM122.8m (-8.2% y-o-y) withsales volume falling by 2.3%. Its  VFMbrand Winston experienced sales erosion after sub-VFM cigarettes were sold atbelow-minimum prices in early-2011. Its premium brand Mild Seven, on the otherhand, saw market share gains as marketing efforts since the early-2000s bearfruit. We adjust our FY12-13 earnings upwards by 1.2-2.1% and maintain BUY onJTI.

Within estimates.JTI recorded 4Q revenue of RM265.6m (-4.3% y-o-y,  -20.7% q-o-q) while earnings came in atRM18.07 (-33.9% y-o-y, -54.5% q-o-q). Sales volume plunged q-o-q afterstockpiling efforts prior to the 2012 Budget announcement in 3Q and also declinedy-o-y, in line with the shrinking legal cigarette market. All in, full yearearnings totaled RM122.8m (-8.2% y-o-y), representing 97.5% of our forecast butbelow consensus estimates at 93.9%. Winston takes the hit. JTI's VFM segmentflagship brand Winston saw its market share eroded to 10.0% (-0.6ppt y-o-y)following illegal selling of sub-VFM cigarettes at RM3.50 per pack earlier inthe year (the government-mandated minimum price for sub-VFM cigarettes isRM7.00) and prevalent illicit sticks. VFM smokers tend to be more price sensitive,hence  are  more likely to decide to downtrade to lowerquality sub-VFM cigarettes when prices are attractive. Consumption of illicitsticks remains a concern at 36.1% of cigarettes smoked, and chances are thatVFM and sub-VFM smokers are the ones purchasing most of these cigarettes giventheir price sensitivity.

Mild Seven the brightspot. Although JTI still derives the majority of its revenue from the VFMsegment, its premium brand Mild Seven has experienced strong market share growthfollowing aggressive marketing efforts since the early-2000s, dethroning Salem tobecome JTI's leading premium brand. Mild Seven increased its market share to4.1% (+0.6ppt y-o-y) while JTI as a whole saw its market share maintained at19.8% compared to the prior year. This implies that JTI's volume fell in tandemwith the industry's 2.3% volume contraction.

Maintain BUY. Weadjust our FY12 and FY13 earnings upwards by 1.2% and 2.1% following the largercash pile of RM259.9m. As we roll forward our valuation horizon, our FCFFvaluation provides us a FV of RM7.96,premised on a  cost of equity of 7.5% andterminal growth of 1%. With a 11.2% potential upside, we maintain JTI as a BUY.

Source: OSK188