Japan Tobacco is looking to rebrand Mild Seven as “Mevius” from February 2013 as it attempts to make a mark outside Asia. The rebranding will involve higher advertising and repackaging costs, but the company hopes this will boost sales volume and brand awareness. Meanwhile, JTI disclosed at its analyst briefing last Friday that its share of the Malaysian VFM market has declined as an illegal brand by the name of „John‟ is gaining a foothold among cost-conscious smokers. Maintain BUY, FV RM7.54. A near term catalyst lies in the increasing likelihood of excise duty staying put in the upcoming 2013 Budget.
Same thing, different name. Japan Tobacco (JT) has launched a global rebranding initiative to rebrand its leading Premium cigarette brand, Mild Seven. Japan‟s best-selling cigarette and a rising star in Malaysia, the 35-year old brand will be renamed “Mevius” from early February 2013 as the company seeks to strengthen the brand‟s popularity outside Japan. Mild Seven‟s blue colour scheme and logo will, however, remain. The name change is anticipated to propel the Asian-centric brand into the European market as European regulators frown upon the term “mild”, which they deem this as implying lower health risks. The “M” and “S” within “Mevius” symbolize the first letters of “Mild Seven”, while “EV” and “IU” represent “evolution” and “you and I (JT‟s relationship with its customers)”. The group will incur additional costs from the rebranding in the form of advertising and packaging changes although the greater brand awareness over the longer term should help boost sales volume.
A "sophisticated‟ illicit. Mild Seven‟s consumption in Malaysia grew 12.5% y-o-y in 2QFY12 for a 5.3% market share while Winston sales dipped 2.8%, for a 0.5 ppt market share decline to 11.2%. The deterioration in Value-for-Money (VFM) brand‟s volume can be attributed to the growing presence of an illegal local brand, „John‟. This local brand has been cannibalizing volume from the Value-for-Money segment, hitting BAT‟s Pall Mall even harder. Unlike most illicit cigarettes, „John‟ appears to comply with Malaysian tobacco regulations. Its packaging also complies with the Government‟s pictorial health warning requirement and has a security mark as well as an address (albeit an inaccurate one). This makes it harder for the authorities to crack down on its distribution and consumption. The brand is believed to be selling at RM3.50 per 20-stick pack.
Maintain BUY. We value JTI at RM7.54, based on our FCFF model (cost of equity: 7.5%, terminal growth: 1.0%). The near term catalyst remains the increasing likelihood of tobacco excise duty remaining unchanged for a second consecutive year when the 2013 Budget is announced next month. As the industry‟s long term prospects remain bleak, another excise duty hikes is likely to send industry volume growth back into negative territory.
Source: OSK
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