JT International (JTI) wrapped up FY11 with a lower net profit
of RM123mil. Earnings for the 12 months ended December 2011 came in largely
within expectations, accounting for 96% of our forecast and 94% of consensus estimates.
As anticipated, JTI posted a lower 4Q net profit of RM18mil (QoQ:
-55%) on the back of a 21% decline in turnover. The fall in cigarette sales
volume was not surprising due to seasonal de-stocking activities post the last
Budget reading in October 2011. Bottom-line growth was also impacted by a lower
EBIT margin, which contracted 7ppts to 10% due to a spike in A&P
expenses.
On a YoY basis, turnover and net profit were down 1% and 8%,
respectively. Taking cue from industry data, we estimate JTI’s cigarette sales
volume for the full year underperformed the total industry volume’s (TIV) -2.3%
YoY decline. The poor performance was mainly the result of:- 1) Lost sales
volume due to a furious growth of illegal sale of sub-VFM labels below the
minimum pricing of RM7.00/pack back in 1QFY11 and; 2) Aggressive A&P activities
by industry player British American Tobacco (ROTH Mk Equity, Hold) within JTI’s
domain – in the VFM segment.
Moving forward, we expect JTI to embark on well-targeted strategies
to claw back lost market share. Market share of the group’s bread-and-butter
Winston label for FY11 was clipped by 0.6ppt to 10%, much to BAT’s gain.
Fortunately, the loss was partially offset by increased market share for the
Mild Seven label (YoY: 0.6ppt to 4%).
Whilst the status quo in tobacco excise duty is supportive of a healthier TIV
growth, we anticipate increased competition ahead for JTI in view of further
product launches (capsule variants) by both BAT and Philip Morris (Malaysia).
Management did not declare any dividend for the quarter, similar
to the previous years. Total dividend of 30 sen/share for FY11 is on par with
the amount declared in last two years.
We are downgrading JTI from Buy to Hold due to limited upside potential. Our DCF-based fair value of RM7.20/share remains
unchanged. We believe the group is being conservative by conserving its cash
hoard to finance increased A&P activities to tackle the loss of market
share at this juncture. That said, we are not ruling out the possibility of a
dividend surprise in the future. Balance sheet is strong with net cash of
RM259mil as at end-FY11.
Source: AmeSecurities
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