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JT International - Shuts Down Leaf Ops

kiasutrader
Publish date: Wed, 27 Feb 2013, 10:00 AM

JTI's  FY12  core  earnings  of  RM113.5m  (-7.6%  y-o-y)  missed  expectations  as continued  weakness  in  its  flagship  VFM  brand  Winston  dragged  sales  volumes down. The company has also closed down its leaf and stemmery operations, citing a challenging operating environment, and booked a RM12.2m restructuring charge as a  result.  We  keep  our  forecasts  under  review  pending  further  information  at  its analyst briefing today. Maintain NEUTRAL. 
 
Below  estimates. JTI posted 4QFY12 revenue of RM290.0m (+9.2% y-o-y, -9.1% q-o-q) and headline earnings of just RM3.0m (-83.4% y-o-y, -90.4% q-o-q) following a RM12.2m restructuring  charge  as  the  company  ceased  its  leaf  and  stemmery  operations.  Stripping off the restructuring charge, 4Q profit would come in at RM15.2m (-15.9% y-o-y, -51.2% q-o-q),  still  weaker  amid  poor  Value-for-Money  (VFM) cigarette  sales.  The  sequential earnings  contraction  can  be  partially  explained  by  the  seasonality.  Cigarettes  typically experience  strong  volumes  in  3Q  in  anticipation  of  potential  tobacco  excise  hikes  in  the annual  Budget.  Weak  sales  volume  subsequently  follows  in  4Q  as  retailers  gradually deplete their high stockpiles. Full year revenue and core earnings came in at RM1,234.3m (+3.0%  y-o-y)  and  RM113.5m  (-7.6%  y-o-y),  accounting  for  91.6%  and  89.9%  of  our  and consensus forecasts.

Shutting  down  its  leaf  and  stemmery  operations.  The  shutdown  came  following  a review of JTI's business and operating environment over the past couple of years.  The challenges it had faced over the past year, including declining volumes and market share for  its  key  brand  Winston,  led  to  the  decision.  The  company  also  ceased  purchases  of tobacco leaves from local farmers as a result of the shutdown. The RM12.2m restructuring charges seen this quarter thus include a RM3.3m impairment on PPE, a RM4.2m sum for employee separation payments and a RM3.1m goodwill payment to local tobacco farmers.

Eagle  continues  to  struggle.  Winston, JTI's flagship VFM brand, saw market share shrink further to 9.8% in FY12 from 10.0% a year ago as  price sensitivity among its target consumers  saw  some  of  them  opting  for  illicit  cigarettes  or  cigarettes  sold  below  the government-mandated  minimum  price  of  RM7.20  per  pack.  Mild  Seven,  the  sole  bright spot  for  JTI  over  the  past  year,  nonetheless continued  to  outperform,  growing  its  market share by 0.3ppt to 4.4%.
 
Maintain NEUTRAL. We are putting our forecasts under review pending further details on the company's future prospects and endeavours at its analyst briefing today.
Source: OSK
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