JT International (JTI) wrapped up FY11 with a lower net profitof RM123mil. Earnings for the 12 months ended December 2011 came in largelywithin expectations, accounting for 96% of our forecast and 94% of consensus estimates. 

As anticipated, JTI posted a lower 4Q net profit of RM18mil (QoQ:-55%) on the back of a 21% decline in turnover. The fall in cigarette salesvolume was not surprising due to seasonal de-stocking activities post the lastBudget reading in October 2011. Bottom-line growth was also impacted by a lowerEBIT margin, which contracted 7ppts to 10% due to a spike in A&Pexpenses. 

On a YoY basis, turnover and net profit were down 1% and 8%,respectively. Taking cue from industry data, we estimate JTI's cigarette salesvolume for the full year underperformed the total industry volume's (TIV) -2.3%YoY decline. The poor performance was mainly the result of:- 1) Lost salesvolume due to a furious growth of illegal sale of sub-VFM labels below theminimum pricing of RM7.00/pack back in 1QFY11 and; 2) Aggressive A&P activitiesby industry player British American Tobacco (ROTH Mk Equity, Hold) within JTI'sdomain ' in the VFM segment.

Moving forward, we expect JTI to embark on well-targeted strategiesto claw back lost market share. Market share of the group's bread-and-butterWinston label for FY11 was clipped by 0.6ppt to 10%, much to BAT's gain.Fortunately, the loss was partially offset by increased market share for theMild Seven label (YoY:  0.6ppt to 4%).Whilst the status quo in tobacco excise duty is supportive of a healthier TIVgrowth, we anticipate increased competition ahead for JTI in view of furtherproduct launches (capsule variants) by both BAT and Philip Morris (Malaysia).  

Management did not declare any dividend for the quarter, similarto the previous years. Total dividend of 30 sen/share for FY11 is on par withthe amount declared in last two years. 

We are downgrading JTI from Buy to Hold due to limited upside potential. Our DCF-based fair value of RM7.20/share remainsunchanged. We believe the group is being conservative by conserving its cashhoard to finance increased A&P activities to tackle the loss of marketshare at this juncture. That said, we are not ruling out the possibility of adividend surprise in the future. Balance sheet is strong with net cash ofRM259mil as at end-FY11.

Source: AmeSecurities