During RJR’s analysts briefing, Management shared that Winston, the key reason behind the firm’s poor performance in the past two years, has finally seen its market share stabilize. While substantial cost savings are likely in FY14, as RJR fully migrates to imported tobacco leaves for its cigarette production, an excise duty hike will dampen an already weak industry volume. Maintain NEUTRAL, with a MYR6.77 FV.

Winston finds some footing. Although JT International’s (RJR) shipping volume fell by 3.8% y-o-y in 1QFY13, its distributor-to-trade market share rose 0.2ppt to 21.7% amid a 4.8% industry volume decline.Mild Seven, the firm’s flagship Premium cigarette, was RJR’s only growing brand with, increasing its volume by 5.0% y-o-y and market share by 0.6ppt to 6.0%. Winston, which makes up 51.7% of RJR’s total volume, saw sales drop by 5.3% y-o-y and market share easing by 0.1ppt to 11.2%. While we take comfort that Winston’s share of the market is stabilizing, it is getting the same share of a shrinking pie.  

Nielsen data also shows Winston stabilizing. Nielsen’s data, which is an indicator of consumption rather than shipping volume, shows that while RJR lost 0.1ppt of market share to 19.7%, both Mild Sevenand Winston clocked in 0.1ppt market share gains to 4.5% and 9.9% respectively. Nielsen’s data, however, excludes cigarettes sold at 7-Eleven stores, which account for ~30% of total sales.     

More illicit whites. Although the illicit trade has fallen by 1.6ppt to 34.5% of cigarettes consumed last year, much of the decline was attributable to the reduction in smuggled kretek. Smuggled whites, which are closer substitutes to legal cigarettes, actually gained 0.8ppt in market share. This may partly explain the weak legal volumes despite lower illicit trade.

Here comes Mevius. RJR will likely be incurring higher y-o-y marketing expenses in 3Q following the brand name change for Mild Seven to Mevius this month. The name change is intended to facilitate marketing of the cigarette as a full flavour cigarette, which was previously more difficult given the Mildconnotation. Malaysians in general prefer full flavour cigarettes, which explains the popularity of Dunhill.  

Source: RHB