FY18 CNP of RM468.5m (-7%) and total dividends of 155.0 sen were as expected. Illicit market share remains at unprecedented levels, registering at 64% in 4Q18. Lower total industry indicates an overall reduction in consumption, from stricter enforcement on illegal products and affordability of legal offerings. Alternative products may be in the works, but these are serving as a long-term endeavour. Maintain UP but raise our TP of RM32.65 (from RM29.10) on higher valuations.

FY18 within. FY18 net profit of RM468.5m is within our estimates but above consensus, making up 102% and 106% of respective full-year expectations. A final dividend of 47.0 sen led to a total FY18 payout of 155.0 sen, which is within our anticipated 150.0 sen (c.95% of net profit).

YoY, 12M18 revenue of RM2.82b (-3%) was lower in lieu of the decline in total industry volume (est. CY18: 588k sticks/mth vs CY17: 610k sticks/mth) while the illicit cigarette trade continues to account for 63% of market share. The decrease in operating profits by 2% was supported by leaner operating expenditure, leading to slightly better margin of 22.5% (+0.2ppt). 12M18 core net profit registered at RM468.5m (-7%) after higher effective taxes and adjustments from oneoff restructuring expenses in 12M17.

QoQ, 4Q18 sales of RM770.6m improved by 5%, likely thanks to higher volumes purchased pre-SST price hike and subsequently higher prices after. This is in spite of higher illicit trade share of 64.0% (+1.0ppt). However, operating profits fell by 16% (margins at 21.1%. -5.0ppt) due to the higher margin environment during 3Q18’s “tax-holiday” season. Subsequently, 4Q18 net earnings registered at RM116.4m (-20%), also on higher taxes.

Still foggy. While industry volume only registered a 4% decline YoY, the persistently shrinking market suggests that illegal smokes too are on the decline. Credit could be given to stricter enforcement and punishment for those involved in the illicit trade. While this is in hopes that smokers would return to consuming legal products, affordability remains a concern with CY19 being fully exposed to the new SST-led prices and down-trading. Recall that in Nov 2018, prices per pack were raised by 40.0 sen on this tax. Additionally, the smoking ban in eateries could further discourage smoking. While management mentioned sales from these outlets only account to 2% of sales, we believe these outlets may not necessarily be the channel of choice for purchasing cigarettes. Commenting on the introduction of alternatives to conventional products, management is hopeful to offer such products (i.e. ecigarettes) but this could be a long-term endeavour due to the process involved to obtain the necessary approvals and permits.

Post-results, we tweak our FY19E net earnings by +1.0% as we incorporate FY18 results. Additionally, we also introduce our FY20E numbers.

Maintain UNDERPEFORM but with a higher TP of RM32.65 (from RM29.10, previously). We ascribe a higher valuation of 20.0x FY19E PER (from 18.0x FY19E PER), which is close to the stock’s -1.0SD over its 3-year mean (from -1.5SD over its 3-year mean. This is in lieu of the better operating environment aligned with the management’s continuous initiatives to review and rationalise expenses. However, we keep our UNDERPERFORM call as we believe current trading valuations are stretched given the lack of favourable catalysts to boost the legal volume growth.

Source: Kenanga Research - 22 Feb 2019