Following  the  analyst  briefing  yesterday,  we  are  lifting  our  FY13  and FY14 core earnings forecasts by 5.3% and 5.2% respectively. We expect 3QFY13  TIV  to  weaken  given  the  full  quarterly  impact  from  the  30 sen/pack  hike  in  cigarette  prices.  We  also  expect  a  hike  in  excise  duty in the 2014 Budget. We raise RJR’s FV to MYR6.93 from MYR6.77, based on FCFF valuation (COE: 7.4%, TG: 1.0%). Maintain NEUTRAL. 
 
- Sales  performance  review.  Sales  of  RJR’s premium flagship brand, Mevius,  grew  9.3%  y-o-y  in  1HFY13  while  that  for  its  value-for-money (VFM)  brand,  Winston  –  accounting  for  51.9%  of  the  company’s sales volume – dipped 2.5% y-o-y. Mevius, a rising star, saw its market share improve 70 ppts y-o-y to 6% while Winston’s remained stable at 11.3%. Overall, RJR’s total sales volume was flat (-0.3% y-o-y).

- The industry outlook. We expect 3QFY13 total industry volume (TIV) to weaken  due  to  the  full  quarterly  impact  arising  from  the  30  sen/pack increase  in  cigarette  prices.  The  July-Aug  Ramadan  month  may  also have played a role in pressuring cigarette demand. Although the share of illicit  white cigarettes dipped  by  a  marginal  0.5ppt to 23%  in  the  March-May  2013  vs  Oct-Dec  2012  period,  it  still  remains  high.  Elsewhere,  we expect  the  upcoming  2014  Budget  to  propose  an  excise  duty  hike  on cigarettes since the Government is facing more urgency in containing its budget deficit.

- Forecasts  and  risks. We  raise  our  FY13  and  FY14  core  earnings forecasts  by  5.3%  and  5.2%  respectively  to  MYR122.6m  and MYR122.7m.  The  key  risks  to  our  forecasts  include:  i)  a  higher  than expected excise duty hike, and ii) weaker sales volume.

- Investment  case.  Following  the  upward  revisions  in  our  financial forecasts, we raise RJR’s FV to MYR6.93 from MYR6.77, based on FCFF  valuation  (COE:  7.4%,  TG:  1.0%).  We  remain  NEUTRAL  on  the stock  given  its  decent  dividend  yield  but  expect  a  duty  hike  to  have  an  adverse  financial  impact  on  RJR,  given  its  high  exposure  to  the  VFM market,  where  smokers  are  cost-conscious  and  are  more  inclined  to switch to illicit cigarettes.

Source: RHB