JTINER (FV RM7.96 - BUY) FY11 Results Review: The Eagle Falls

JTI registered FY11 earnings of RM122.8m (-8.2% y-o-y) with sales volume falling by 2.3%. Its  VFM brand Winston experienced sales erosion after sub-VFM cigarettes were sold at below-minimum prices in early-2011. Its premium brand Mild Seven, on the other hand, saw market share gains as marketing efforts since the early-2000s bear fruit. We adjust our FY12-13 earnings upwards by 1.2-2.1% and maintain BUY on JTI.

Within estimates. JTI recorded 4Q revenue of RM265.6m (-4.3% y-o-y,  -20.7% q-o-q) while earnings came in at RM18.07 (-33.9% y-o-y, -54.5% q-o-q). Sales volume plunged q-o-q after stockpiling efforts prior to the 2012 Budget announcement in 3Q and also declined y-o-y, in line with the shrinking legal cigarette market. All in, full year earnings totaled RM122.8m (-8.2% y-o-y), representing 97.5% of our forecast but below consensus estimates at 93.9%. Winston takes the hit. JTI’s VFM segment flagship brand Winston saw its market share eroded to 10.0% (-0.6ppt y-o-y) following illegal selling of sub-VFM cigarettes at RM3.50 per pack earlier in the year (the government-mandated minimum price for sub-VFM cigarettes is RM7.00) and prevalent illicit sticks. VFM smokers tend to be more price sensitive, hence  are  more likely to decide to downtrade to lower quality sub-VFM cigarettes when prices are attractive. Consumption of illicit sticks remains a concern at 36.1% of cigarettes smoked, and chances are that VFM and sub-VFM smokers are the ones purchasing most of these cigarettes given their price sensitivity.

Mild Seven the bright spot. Although JTI still derives the majority of its revenue from the VFM segment, its premium brand Mild Seven has experienced strong market share growth following aggressive marketing efforts since the early-2000s, dethroning Salem to become JTI’s leading premium brand. Mild Seven increased its market share to 4.1% (+0.6ppt y-o-y) while JTI as a whole saw its market share maintained at 19.8% compared to the prior year. This implies that JTI’s volume fell in tandem with the industry’s 2.3% volume contraction.

Maintain BUY. We adjust our FY12 and FY13 earnings upwards by 1.2% and 2.1% following the larger cash pile of RM259.9m. As we roll forward our valuation horizon, our FCFF valuation provides us a FV of RM7.96, premised on a  cost of equity of 7.5% and terminal growth of 1%. With a 11.2% potential upside, we maintain JTI as a BUY.

Source: OSK188