Better-than-expected, but still … We continue to anticipate that illicit trade volumes could increase due to the huge price gap between legal and illegal product market prices. Down-trading from premium to aspirational premium and value-for-money products could also be anticipated as consumers attempt to work around the issue of affordability. As recently reported in the news media, the Malaysian International Chamber of Commerce and Industry (MICCI) called for a special multi-agency task force to be set up to tackle the issues of smuggling and illicit trades. While we agree that more aggressive enforcement could be necessary to address the problem, we stay from any positive expectations at the moment as delivering results has proven to be a challenge as in past regimes.

With this update, we tweak our estimates to reflect a less narrow gap between the sales of premium and non-premium brands. We had earlier accounted for a much wider gap from the existing sales mix (2Q18: premium brands account for c.75% of sales). Nonetheless, we still maintain our passive stance on legal volume growth. This resulted in a 3.2%/4.2% improvement in our FY18E/FY19E earnings estimates from our sector update revision.

Maintain UNDERPERFORM but with a higher Target Price of RM28.25 (from RM27.10, previously). This is based on an unchanged 18.0x FY19E PER (-1.5SD 3-year mean) on a revised EPS. Dividend yield of 4.5% for both FY18E/FY19E may seem decent, but is likely to be dampened by potential capital downside.

Risks to our call include: (i) faster-than-expected recovery of legal market share, (ii) lesser-than-expected conversion towards less premium brands, and (iii) significant decrease in forex to improve cost of sales.

Source: Kenanga Research - 12 Sep 2018