RJR recorded 1QFY13 earnings of MYR38.8m (+4.0% y-o-y) despite weaker sales volume as better premium sales helped lift margins. Although we raise our earnings forecast to reflect lower-than-expected operating expenses, we see a high likelihood of a tobacco excise hike, which will further dampen the already weak industry volume. Special dividends in the near term are also unlikely given RJR’s low cash pile. Maintain NEUTRAL, with MYR6.77 FV.

Above expectations. JT International (RJR) posted 1QFY13 revenue of MYR309.9m (-3.6% y-o-y, +6.9% q-o-q) on a 7.0% y-o-y decline in sales volume. Sales, however, were seasonally stronger q-o-q, mainly due to: i) higher consumption during the festive season, and ii) low sales volume in 4Q due to stockpiling efforts by retailers in 3Q. Core earnings came in at MYR38.8m (+4.0% y-o-y, +155.5% q-o-q) amid stronger y-o-y premium sales coupled with lower raw material and operating costs, while lower marketing expenses boosted the q-o-q surge. 1QFY13 profit represented 36.1% and 31.7% of our and consensus estimates. 1Q earnings have historically accounted for 31.6% of full-year profits.  

Stable market share. Although RJR’s sales volume declined by 7.0% y-o-y, its market share dipped just 0.1ppt to 19.7% amid weak industry volume. The firm’s flagship premium brand Mild Seven (rebranded asMevius this month) saw its market share tick up 0.1ppt to 4.5%, while its key value-for-money (VFM) brand Winston also saw a similar market share gain to 9.9%. This suggests that non-core brands likeSalem and Camel have suffered market share declines.

Maintain NEUTRAL. We raise our FY13 and FY14 earnings forecasts by 8.3% and 3.3% respectively due to the overprovision for operating expenses previously. Our FV is hence nudged up to MYR6.77 (from MYR6.64 previously), based on our FCFF model (cost of equity: 7.4%, terminal growth: 1.0%). We expect tobacco excise duties to be further raised closer to the Budget 2014 announcement date to boost Government’s coffers, placing a further dampener on the already soft industry volume. We see low chances of a special dividend in the near term, given RJR’s relatively low cash pile of MYR95.6m, the lowest since 3QFY09.

Source: RHB