MYR1/sh Net Cash No Longer A Barrier? JTI announced a special dividend of 21sen/share that translates into an immediate yield of 3.4%. The special payout is a surprise, and should lead to short-term upward momentum in its share price. We are positive on this development, as it now appears that investors may not need to wait till JTI’s net cash hits MYR1/share before it pays special dividends. Aside from this, we remain bullish on JTI longer-term, as cost reductions arising from its plan to cease purchasing pricey local tobacco leaf will drive earnings. Reiterate BUY with a DCF-based TP of MYR7.40.

Pleasant surprise. The single tier special dividend (tax exempt) of 21sen/share was unexpected, as JTI usually pays a special dividend only when its net cash per share hits MYR1. However, its net cash as of 31 Dec 2012 was 57sen/share. The early special payout could be attributable to the needs for repatriation of funds by its major shareholder, back to Japan, for the post-earthquake reconstruction. The Japanese government is a major shareholder of Japan Tobacco Group, which in turn owns 60% of JT International Bhd (JTI Malaysia).

Re-rating from restructuring. JTI’s move to discontinue the purchase of relatively pricey local tobacco leaf (see our update note on 28 Feb 2013) will result in cost savings starting this year, although these would only be significant after 2013 when 100% foreign leaf is used. Amid flattish industry volume growth, JTI’s cost savings would drive its earnings growth going forward. Meanwhile, we think its market share would be maintained, as Mild Seven’s continued share gains offset Winston’s lacklustre market share growth.

Reiterate BUY with TP of MYR7.40. The ex-date of the special dividend is 19 Mar 2013. The special payout shows JTI’s commitment to rewarding its shareholders, in our view, and signals more potential special payouts going forward, even when its net cash is below MYR1/share. Adding the 21sen/share special payout to JTI’s normal net dividend of 22sen/share gives an FY13 net dividend yield of 7%. Reiterate BUY on JTI, with a DCF-based TP of MYR7.40.

Source: Maybank Research - 06 Mar 2013