Company Name: JT INTERNATIONAL BHD
Research House: OSK
JT International Bhd
(March 10, RM6.60)
Upgrade to buy at RM6.56 with target price raised to RM7.30 (from RM6.32): In FY08, JTI declared a capital repayment of 75 sen per share (2H) and total dividends of 58 sen per share (1H). The repayment was declared when its cash pile was a whopping high at RM265 million. The repayment resulted in its share capital being reduced to RM65.38 million from RM261.5 million.
Paid out in 1QFY09, the capital repayment amounted to some RM196 million, representing 73% of its FY08 cash balance (RM267 million).
Taking into account its recurring 30 sen per share dividend, JTI incurred a cash outlay of RM254.8 million in dividends and capital repayment for 2009. The total amount (in recurring and capital repayment only) represented about 95% of its cash balance as at late FY08/early FY09.
JTI's total cash shrank from RM267 million in 4QFY08 to RM70 million in 1QFY09 following its dividend and capital repayment. Since then, the company's cash position has been increasing at an average RM13.6 million every quarter.
This average increase takes into account the 30 sen tax-exempt dividend it pays out annually. Our average cash increase assumption also strips out JTI's one-off cash received from repayment from a trustee account totalling RM24 million for both years.
Based on the average cash increase of RM13.6 million per quarter, hypothetically JTI's total cash could range from RM240 million to RM260 million in 4QFY11/1QFY12. This is close to the previous high of RM265 million, based on which JTI declared a 75 sen per share capital repayment. The company's net cash per share stood at 72 sen as of its latest reporting quarter. Another plus is that JTI is also debt-free.
With its growing cash pile, JTI is likely to declare special dividends on top of its annual recurring 30 sen per share dividend.
Though our year-end FY11 cash forecast at RM227.1 million is still below the previous capital repayment trigger point of RM265 million, there is still a possibility of a capital repayment.
Based on its previous cash outlay of 95%, this would mean that JTI would fork out cash of around RM215.7 million in FY12 (assuming a special dividend is declared in late FY11 and paid out in 1QFY12). This would translate to a total dividend of about RM1.10 per share (30 sen dividend per share plus a special dividend of 80 sen per share).
Besides a possible dividend payment, JTI may look for an acquisition target domestically to expand its market presence.
However, given increasing illicit trade ' which currently stands at 40% of all cigarettes sold in the street ' we find this option a risky venture for now.
Our expectation of a high dividend payout may also not be met if JTI chooses to retain funds in view of the industry's market pie shrinking over time on high illicit trades stemming from an increase in tobacco excise duties.
We raise our valuations for JTI to a target price of RM7.30 from RM6.32 previously. Our higher target price is arrived at after lowering our weighted average cost of capital assumption to 8.32% from 9.4%, noting the possibility of a bumper special dividend.
Translating to a stock upside of 11.2% coupled with a gross recurring dividend yield at 4.6%, we upgrade the stock to a 'buy' from 'neutral' previously.
Although we have yet to receive any indication of when or how much the possible special dividend might be, we note that its likelihood is high given its growing cash pile. ' OSK Research, March 10
This article appeared in The Edge Financial Daily, March 11, 2011.