RJR’s  9M13  core  profit  of  MYR102m  (+3%  y-o-y)  was  within  our  and consensus  expectations.  Although  9M  sales  were  flat,  its  bottomline grew slightly, bolstered by  improving margins and a better product mix. We  will  release  an  update  next  Monday  following  the  analyst  briefing today.  For  now,  we  maintain  our  SELL  call  on  RJR,  with  our  FV  at MYR5.72, based on FCFF valuation (COE: 9%, TG: 1%).

• Within  expectations.  Although  RJR’s  9M13  core  profit  of  MYR102m (+3%  y-o-y)  made  up  83%  and  81%  of  our  and  consensus’  full-year forecasts,  we  deem  the  results  within  expectations  given  that  the  OctDec  quarter  is  seasonally  weaker.  In  3Q13,  core  earnings  fell  by  a marginal 1% y-o-y (-0.5% q-o-q), weighed down by lower sales volume (-8%  y-o-y)  and  higher  marketing  expenses.  However,  this  impact  was softened  by  hikes  in  cigarette  prices  (Oct  2012:  +20  sen/pack,  June 2013:  +30  sen/pack)  and  an  improved  product  mix.  The  company declared an interim dividend of 11 sen (3Q12: 11sen).
• Outlook. As a result of the increase in cigarette prices by MYR1.50/pack two months ago (due to a 14% excise duty hike), we foresee a significant slowdown  in  industry  volume  growth  amid  a  proliferation  of  illicit cigarettes.  Furthermore,  we  think  that  the  Government’s  other  subsidy rationalisation measures  may  also  erode  consumers’  disposal incomes and dent overall sales volume.
• Forecasts & risks.  Since RJR’s 9M13 results were within expectations and  pending  a  briefing  for  analyst  later  today,  we  leave  our  forecasts unchanged.  The key risks to our forecasts are: i) stronger sales volume, and ii) lower-than-expected raw material cost.
• Valuation  &  recommendation.  We  maintain  our  SELL  call  and  our MYR5.72  FV, based on FCFF valuation (COE: 9%, TG: 1%).  We think the  stock’s  implied  FY14  P/E  of  12x  is  fair  compared  to  the  17.5x ascribed  to  British American Tobacco Malaysia (ROTH  MK,  SELL, FV: MYR57.06).  The 30%  discount  reflects  RJR’s  lower  dividend  yield  and high exposure to the value-for-money (VFM) market, where smokers are cost-conscious and more inclined to switch to illicit cigarettes.

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SWOT Analysis

Company Profile
JT International (RJR) is in the business of manufacturing and distributing cigarettes. The company, which derives most of its revenue from the value-for-money (VFM) segment, has key brands such as Winston and Mevius.

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Source: RHB