Company Name: JT INTERNATIONAL BHD
Research House: OSK
Maintain 'underweight': In view of lower consumption and possibly higher illicit trade in the future, we project that tobacco industry volume will fall by 8%, thus resulting in tobacco manufacturers experiencing an earnings decline ranging from 5% to 10% next year. Notably, we expect the sector to see: (i) higher selling prices resulting in downtrading to value-for-money (VFM) brands from premium brands; (ii) a greater incidence of illicit trade, which will correspondingly cause the legal market to shrink; and (iii) a greater likelihood of brand switching in 2011.
BAT, in our opinion, could face a tough year in FY2011. On the back of declining tobacco industry volumes, we expect earnings to decline in spite of higher selling prices. Nevertheless, there may be a positive re-rating catalyst for the stock should its re-launched Peter Stuyvesant garner a higher market share next year.
JTI is likely to chart slightly lower earnings on lower industry volume. Although we see stiff competition among competitors limiting the earnings upside going forward, the company's sizeable net cash position means that it would still be able to pay out dividends. Notwithstanding the possibility of a special dividend payout, assuming that JTI paid a gross dividend of 30 sen per share, this will translate into a gross yield of 4.9%.
With concern over declining sales clouding the sector, we maintain our 'underweight' recommendation. In line with our conservatism, we maintain our 'sell' recommendation on BAT with its target price unchanged at RM38.75, while JTI is maintained a 'neutral', with its target price intact at RM5.96. ' OSK Investment Research, Dec 29
This article appeared in The Edge Financial Daily, December 30, 2010.