Within estimates. JTI posted 2QFY12 revenue of RM303.8m (-0.9% y-o-y, -5.5% q-o-q) and earnings of RM29.4m (-3.5% y-o-y, -22.1% q-o-q). A marginal 0.8% decline in sales volume,  coupled  with  increased  marketing  and  operating  expenditures  following  the introduction  of  a  new  range  of Winston  cigarettes,  were  the  culprits  in  dragging  its  2Q earnings.  1HFY12  revenue  and  profits  clocked  in  at  RM625.2m  (+4.7%  y-o-y)  and RM67.2m  (+3.3%  y-o-y)  respectively,  aided  by  stronger  volumes  and  an  increasing presence in the premium segment but partly suppressed by higher marketing expenses. The 1HFY12 earnings represent 49.5% and 52.1% of our and consensus estimates.

Seafarers sail, but the Eagle falls. JTI's flagship premium brand Mild Seven (the name of  which  will  be  changed  to  Mevius  beginning  Feb  2013)  saw  a  market  share  gain  of 0.4ppt to 4.3% during the first half of the year. Winston, the industry's leading Value-for-Money  (VFM)  brand and the company's largest volume contributor, however,  saw market share shrink by 0.6ppt to 9.7%. Winston's decline led JTI's total market share to erode  to  19.7%  from  20.0%  previously.  Likewise,  the  country's  largest  cigarette manufacturer,  BAT,  is  seeing  volumes  decline  by  1.2%  y-o-y.  With  the  industry's 2QFY12  volume  rising  by  a  tame  0.4%  y-o-y,  industry  data  suggests  that  the  only growing  major  cigarette  producer  within  Malaysia is  PMI,  the  manufacturer of  Marlboro cigarettes.

Maintain  BUY.  We  trim  our  FY12  and  FY13  earnings  forecasts  by  4.0%  and  4.9% respectively as we raise our marketing and operating expenditures estimates. Our FV is accordingly  lowered  to  RM7.54,  based  on  our  FCFF  model  (cost  of  equity:  7.5%,
terminal growth: 1.0%). JTI declared another interim dividend of 11 sen per share, which translates  into  a  YTD  dividend  yield  of  9.7%.  The  near  term  catalyst  remains  the increasing likelihood of a second consecutive year of unchanged tobacco excise duties when  the  2013  Budget  is  announced.  Long  term  industry  prospects  remain  bleak, however,  with  a  resumption  of  duty  hikes  post-general  election  likely  to  send  industry volume growth back to negative territory.  

Source: OSK