RJR’s 1HFY13 core earnings (+5.3% y-o-y)  of  MYR70.7m  beat  both  our and  consensus  expectations.  An  interim  dividend  of  11  sen/share  was declared.  We leave our forecasts unchanged pending the company’s analyst briefing later today. For now, we maintain our NEUTRAL stance on  the  stock,  with  an  FV  of  MYR6.77,  based  on  FCFF  valuation  (COE: 7.4%, TG: 1.0%). 
 
- Above  expectations.  RJR’s  1HFY13  core  earnings  of  MYR70.7m (+5.3%  y-o-y)  beat  our  and  consensus  expectations,  representing  61% and 56% of the respective full-year forecasts. In 2QFY13, core earnings rose  5.2%  y-o-y,  thanks  to:  i)  improved  sales  volume  (+1.8%  y-o-y),  ii) higher cigarette  prices,  and  iii)  a  better product mix.  However,  earnings fell 22.2% q-o-q as RJR incurred higher marketing expenses. An interim dividend of 11 sen/share was declared.

- Operating  highlights.  According  to  The  Nielsen  Co, RJR’s 1HFY13 market share was stable at 19.7% (+20 bpts y-o-y). This was fuelled by its  flagship  premium  cigarette,  Mevius,  which  saw  its  market  share increase  by  0.1ppt  to  4.4%  while  the  market  share  of  value-for-money (VFM)  brand  Winston  grew  to  10.0%  from  9.7%  a  year  ago.  Data  from the  Confederation  of  Malaysian  Tobacco  Manufacturers  show  that March-May  2013  consumption  of  illicit  cigarettes  vs  total  consumption was high at 33.6%, although this was a 0.2 ppt dip from Oct-Dec 2012.  

- Forecasts and risks. We are leaving our forecasts unchanged pending the  company’s  analysts’  briefing  later  today.  The  key  risks  to  our forecasts include: i) an excise duty hike, and ii) weaker sales volume.

- Investment case. For now, we continue to value RJR at a MYR6.77 FV, based  on  FCFF  valuation  (COE:  7.4%,  TG:  1.0%).  This  represents  an implied FY14 P/E of 15.0x, which is fair compared with British American Tobacco  Malaysia  (ROTH;  NEUTRAL,  FV:  MYR61.07),  which  is currently trading at 22.5x FY14 P/E. The 33% discount reflects RJR’s: i) lower  dividend  yield,  and  ii)  a  greater  adverse  financial  impact  in  the event of an excise duty hike given its high exposure to the VFM market, as cost-conscious smokers are more inclined to switch to illicit cigarettes. Maintain NEUTRAL.

Source: RHB