JT  International  (JTI)’s  FY13  results  were  in  line  with  our  and consensus  estimates.  We  expect  2014  to  be  a  challenging  year  for domestic cigarette players, following the Government’s imposition of a 14%  excise  duty  hike.  We  keep  our  FY14  estimate  unchanged  and introduce  our  FY15  projection.  We  reiterate  our  NEUTRAL  call  on  the stock, with a MYR6.27 FV.

• In  line.  JTI’s  FY13  core  earnings  of  MYR121.6m  (+7%  y-o-y)  were  in line  with  our  and  consensus  expectations,  making  up  97-98%  of  the respective  full-year forecasts. 4Q13  revenue climbed  14% y-o-y (+8% q o-q), thanks to higher average selling prices (ASPs),  but was  offset  by lower  sales  volume  (-5%  y-o-y,  -6%  q-o-q).  Recall  that  JTI  raised  its cigarette  prices  by  MYR1.50/pack  in  October  after  the  Government imposed an excise duty hike of MYR0.60/pack.   As a result, 4Q13 core profit  soared  33%  y-o-y  but  fell  35%  q-o-q  due  to  higher  marketing expenses and product line discontinuation.
• Outlook. We expect 2014 to be a challenging year for domestic cigarette players,  following  the  Government’s  imposition  of  a  14%  excise  duty hike.  Also,  other  subsidy  rationalisation  measures  by  the  Government may  erode  smokers’  disposable  income  and  dent  overall  legal  sales volume. Notably, illicit cigarette trade had proliferated to 39%  in Oct-Dec from 34% in June-Aug.
• Forecasts  &  risks.  We  leave  our  FY14  estimates  unchanged  and introduce  our  FY15  projection.  The  key  risks  to  our  forecasts  are:  i) stronger sales volume, and ii) lower-than-expected raw material costs.
• Valuation & recommendation.  Although the stock is trading at a steep P/E discount of over 75% against  British American Tobacco (ROTH MK, SELL,  FV:  MYR54.76)  and  offers  decent  yields  of  3-4%,  we  see  no immediate  re-rating catalysts on  the horizon,  given that cigarette players generally  operate  in  a  mature  industry  with  limited  growth  opportunity. Hence, we reiterate our NEUTRAL call on JTI, with an unchanged FCFFbased  FV  of  MYR6.27  (COE:  9%,  TG:  1%),  representing  implied FY14/15 P/Es of 11.9x/11.7x.

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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