JT International - Mevius to fire up premium segment? Hold

- We maintain our HOLD recommendation on JT International (JTI), with an unchanged DCF-based fair value of RM7.20/share. Interim net profit of RM67mil came in broadly within expectations, accounting for 53% of our full-year forecast and 52% of consensus.

- Management has proposed a single-tier interim dividend of 11sen/share, bringing total dividends declared to 73sen (including a special of 38sen). Ex-date date has been fixed for 27 August, while the entitlement date is on 29 August 2012.

- JTI posted a lower net profit for 2QFY12, which fell 22% QoQ, attributable mainly to:- 1) a 6% decline in turnover due to lower cigarette sales volume and; 2) higher A&P expenses which ate into EBITDA margin (QoQ: -2.8ppts).

- On a YoY basis, 1HFY12 turnover and net profit was up 5% and 3%, respectively. The better performance was largely led by market share growth of Mild Seven (YoY: +0.4ppt to 4.3%), which was partially negated by a weak Winston (YoY: -0.6ppt to 9.7%) as a result of continued high level of illicit trades at 34.7% (Oct-Dec 2011: 34.8%) and growing threat from illegal sale of cigarettes below the minimum price. We expect sales momentum for Winston to pick up following the launch of its new line of extensions in April 2012.

- On a separate matter, the Japan-based parent company has unveiled “Mevius” – the result of a rebranding exercise undertaken on one the group’s flagship brands, “Mild Seven”. 

- We understand the surprise move was primarily aimed at better positioning the premium label in the global arena against Philip Morris International’s “Marlboro” and British American Tobacco’s “Dunhill”. The Mild Seven label is the group’s 2^nd best selling label (after Winston) and has yet to be marketed in Europe. 

- Whilst the new look is likely to translate into additional packaging costs for JTI, the expenses are expected to be comparatively smaller (estimated RM2-3mil) versus that incurred during the government-mandated implementation of pictorial health warning (PHW) back in June 2009.

- However, we anticipate higher A&P expenses upon the launch of Mevius as the group seeks to re-educate its customer base. Mevius is expected to be launched in Japan by February 2013, while a staggered roll-out worldwide is targeted within the next 12 months. We see  a potential sales volume boost and market share growth of the premium segment if the A&P campaign is wellexecuted. 

Source: AmeSecurities