JT International - FY12 earnings misses expectations HOLD

- We re-affirm our HOLD recommendation on JT International (JTI) with an unchanged DCF-derived fair value of RM7.20/share.

- JTI’s FY12 earnings missed our and street expectations, making up only 80% of estimates. JTI’s 4QFY12 net profit fell sharply (-90%) QoQ to RM3mil on the back of a softer 9% decline in revenue. Full-year FY12 earnings were down 18% YoY to RM101mil despite a 3% YoY growth in turnover.

- The variance can be mainly attributed to the restructuring activities undertaken by the group in 4QFY12. Besides exiting its leaf and stemmery operations in that quarter, JTI had also ceased its practice of procuring leaves from the domestic growers. Stripping out this RM12mil one-off cost, its normalised net profit would still miss forecasts by 5%.

- JTI’s marginal YoY topline improvement can be attributed to higher sales volumes, in-line with the 2.8% legitimate industry volume growth in FY12, and improved product mix as it tries to grow its premium segment through its Mevius (previously, Mild Seven)brand (FY12 market share up 0.3 of a percentage point to 4.4%).

- JTI’s principal brand and leader in the VFM segment, Winston (53% of sales), continues to battle a declining market share (FY12: 9.8% vs. FY11’s 10%). It has yet to stage a significant volume recovery since losing market share in 1Q10.

- We believe the VFM market’s pie may be shrinking (-0.4ppt YoY) as a result of uptrading activities following overall positive consumer sentiment and higher disposable income.

- We reckon that JTI was aggressively defending its market share in the last year, amidst heightened competition in the premium segment and proliferation of ELPCs and illicits, as it recorded higher operating (+4% YoY) and marketing expenses. The group’s market share dropped to 19.6% in FY12 from FY11’s 19.9%.

- As expected, management did not announce any dividend in the final quarter. Its FY12 gross DPS of 84 sen includes a special 24 sen gross special dividend declared in 1QFY12. At the current price, this translates into a gross yield of 13%.

- Despite the disappointing result, we are keeping our FY13F-FY15F earnings forecasts unchanged at this juncture, pending further details during an analyst briefing today.

Source: AmeSecurities