JT  International  (JTI)  announced  that  it  has  received  a  conditional takeover offer from its parent company, JT International Holding BV, for a cash amount of MYR7.80/share. We think it is an attractive proposition for shareholders – with implied P/Es of 15.0x/14.5x against our FY14/15 EPS  respectively.  We  advise  investors  to  accept  the  takeover  offer, pocketing 20% capital gain. Maintain NEUTRAL. 

Details  of  takeover  offer.  JTI  announced  that  it  has  received  a conditional  takeover  offer  from  its  parent  company,  JT  International Holding  BV, for a  cash  amount  of  MYR7.80/share,  valuing the cigarette company  at  MYR2.04bn.  The  implied  P/Es  against  our  projected FY14/15  EPS  are  15.0x/14.5x  respectively.  A  privatisation  premium  of 20% was ascribed to the stock’s last trading price of MYR6.50/share.

Accept the offer. Compared to British American Tobacco (BAT) (ROTH MK, SELL, FV: MYR54.76), although the implied P/E takeover valuation for JTI represents a ~25% discount, we think it is attractive given that the P/E  gap  between  the  two  has  historically  been  much  wider at  ~30%.  In addition, over the past 15 years, JTI’s share price has not traded near or above the offer price. We think the prevailing structural headwinds in the matured cigarette industry will limit its re-rating catalysts, if JTI continues to  be a  listed  entity.  Hence,  we  advise  investors  to accept the  takeover offer, pocketing 20% capital gain.  

Forecasts. No changes to our forecasts.

Valuation  &  recommendation.  In  view  of  this  development,  we  peg JTI’s FV to its takeover offer price of MYR7.80, implying FY14/15 P/Es of 15.0x/14.5x.  Although  there  is  a  20%  upside  to  its  last  closing  price  of MYR6.50,  we  expect  the  market  to  factor  in  the  privatisation  premium once  trading  resumes,  thus  cancelling  any  arbitrage  opportunities. With that, we maintain our NEUTRAL recommendation on JTI.

Recommendation Chart

Source: RHB