Stock Name: JTINTER
Company Name: JT INTERNATIONAL BHD
Research House: INTER PACIFIC
Tobacco sector
Reiterate neutral: We reiterate our neutral outlook for the tobacco sector. There are no changes to our earnings forecast, with British American Tobacco (M) Bhd (BAT) maintained as neutral with a discounted cash flow-based (DCF) target price of RM42 (weighted average cost of capital of 7.7%) and JT International Bhd (JTI) as outperform with a DCF-based target price of RM6.20 (WACC of 8.5%).
We continue to like JTI due to (1) its growing market share; (2) resilient quality, cash nature of its business; and (3) zero gearing and high dividend yield.
Amid its continuous investment in its global flagship brands ' Winston, Mild 7 and Camel ' they will remain JTI's key drivers to the earnings growth.
To recap, originally, the government initially planned to ban small packs on June 23, 2005 and was deferred to June 1, 2006. Subsequently, the government decided to defer again on June 1, 2006 to June 1, 2010.
On May 27, 2010, four days before the ban was supposed to take effect, the government decided to defer the ban to Jan 1, 2011, indicating it needed time to conduct a study on the impact of the ban of 14 packs on the incidence of illicit trade, currently at an all-time high of 38%.
This raised dissatisfaction especially by Philip Morris International (PMI) and JTI. The deferment would contribute to their earnings losses given that small packs of 14s require much higher operating margins as compared to their packs of 20s. PMI was also considering the option of suing the government if losses are incurred.
However, the government finally decided to implement the ban with immediate effect which was announced three days later after the effective date. This could be due to the brewing dissatisfaction amongst the tobacco players.
Also, it endorses the perception of our constant 'flip-flopping' in policy matters which to some extend, acts as a setback to investors' confidence.
Typically, small packs provide better margin as they are priced about 5% higher on a per stick basis. While demand is unlikely to drop, the ban is ultimately negative for tobacco players as margin will be compromised by either down trading to a lower segment or resort to the proliferation of illicit cigarettes.
We gather that about 40% of BAT's sales are in packs of 14s while JTI has a smaller 30% exposure. ' Inter-Pacific Research, June 8
This article appeared in The Edge Financial Daily, June 9, 2010.
Company Name: JT INTERNATIONAL BHD
Research House: INTER PACIFIC
Tobacco sector
Reiterate neutral: We reiterate our neutral outlook for the tobacco sector. There are no changes to our earnings forecast, with British American Tobacco (M) Bhd (BAT) maintained as neutral with a discounted cash flow-based (DCF) target price of RM42 (weighted average cost of capital of 7.7%) and JT International Bhd (JTI) as outperform with a DCF-based target price of RM6.20 (WACC of 8.5%).
We continue to like JTI due to (1) its growing market share; (2) resilient quality, cash nature of its business; and (3) zero gearing and high dividend yield.
Amid its continuous investment in its global flagship brands ' Winston, Mild 7 and Camel ' they will remain JTI's key drivers to the earnings growth.
To recap, originally, the government initially planned to ban small packs on June 23, 2005 and was deferred to June 1, 2006. Subsequently, the government decided to defer again on June 1, 2006 to June 1, 2010.
On May 27, 2010, four days before the ban was supposed to take effect, the government decided to defer the ban to Jan 1, 2011, indicating it needed time to conduct a study on the impact of the ban of 14 packs on the incidence of illicit trade, currently at an all-time high of 38%.
This raised dissatisfaction especially by Philip Morris International (PMI) and JTI. The deferment would contribute to their earnings losses given that small packs of 14s require much higher operating margins as compared to their packs of 20s. PMI was also considering the option of suing the government if losses are incurred.
However, the government finally decided to implement the ban with immediate effect which was announced three days later after the effective date. This could be due to the brewing dissatisfaction amongst the tobacco players.
Also, it endorses the perception of our constant 'flip-flopping' in policy matters which to some extend, acts as a setback to investors' confidence.
Typically, small packs provide better margin as they are priced about 5% higher on a per stick basis. While demand is unlikely to drop, the ban is ultimately negative for tobacco players as margin will be compromised by either down trading to a lower segment or resort to the proliferation of illicit cigarettes.
We gather that about 40% of BAT's sales are in packs of 14s while JTI has a smaller 30% exposure. ' Inter-Pacific Research, June 8
This article appeared in The Edge Financial Daily, June 9, 2010.
No comments:
Post a Comment