JTINTER (FV RM7.96 - BUY) 1QFY12 Results Review: Windfall Finally Arrives

JTI’s 1QFY12 earnings made a solid comeback  by doubling  on a  q-o-q basis,following a dismal 4QFY11 that was hampered by weaker sales volumes. Its Winston brand, nonetheless, continued to lose popularity but star performer Mild Seven maintained its upward market share  trajectory.  The most interesting  part, however, was the announcement of a RM0.62 per share special dividend, which in and of itself amounts to a stellar 9.1% dividend yield. Maintain BUY with an unchanged FV of RM7.96.

Within estimates. JTI posted a 1QFY12 revenue of RM321.4m (+10.5% y-o-y, +21.0% q-o-q) and net profit of RM37.8m (+9.4% y-o-y, +108.9% q-o-q). Higher y-o-y volumes came on the back of a 1QFY11 that was hampered by sub-VFM cigarettes being illegally sold at half the minimum cigarette price,  thus encroaching on JTI’s price-sensitive customer base. Meanwhile, q-o-q growth was also driven by stronger volumes, following the sharp 16% q-o-q volume decline in  4QFY11. The softer 4Q volume came after stockpiling efforts by retailers and wholesalers in 3Q in anticipation of excise duty hikes during Budget 2012. 1QFY12 profits, which are double that of 4QFY11, were boosted by higher volumes coupled with lower marketing expenditure. The  1QFY12 earnings represent 27.8% and 29.1% of our and consensus forecasts, in line with the average 1Q full-year contribution of 29.8% over the past 6 years.

Seafarers sail. JTI maintained its market share at 19.8% of the total legitimate cigarette market. The market position of flagship VFM brand Winston continued to erode after the 4QFY11  decline,  with its  market share  declining further  by 0.3ppt to 9.8%.  On the contrary, its premium brand and 2nd-best selling cigarette Mild Seven was the company’s outperformer with its market share gaining by 0.4ppt to 4.3%.

Sharing the bounty. The company declared a special dividend  amounting to RM0.62 per share for the quarter, which represents a massive 9.1% dividend yield (excluding recurring yearly dividends). Since March 2011, we believe that a special dividend was in the offing in  light of the company’s gradually increasing cash pile from RM189.2m in 4QFY10 to the current RM294.3m. JTI previously made a capital repayment of RM196.2m (RM0.75 per share) in July 2008 when its cash balances rose to RM265.1m. The current RM0.62 per share dividend translates into a cash outflow of RM162.2m to shareholders.

Maintain BUY. We are keeping our forecasts unchanged given the in-line results and are maintaining our FV of RM7.96, based on our FCFF valuation with a cost of equity of 7.5% and terminal growth of 1.0%. JTI is the only BUY call within our tobacco coverage, with BAT having a NEUTRAL recommendation.

Source: OSK