AmResearch reiterates buy on JTI, hold on BAT

Written by The Edge Financial Daily

Monday, 26 October 2009 14:19

AMRESEARCH has reiterated its buy call on JT INTERNATIONAL BHD [] (JTI) with a slightly higher fair value of RM5.40 (RM5.30 previously) for its better earnings resilience as reflected by its portfolio mix of premium to value-for-money (VFM) of a 50:50 ratio.

The research house’s report was released after the unveiling of Budget 2010 last Friday, which did not see any further excise duty or indirect tax hikes on the tobacco sector.

AmResearch said the government had unexpectedly raised excise duty on cigarettes from 18 sen per stick to 19 sen per stick, a 5.6% hike back on Oct 1.

Following that, British American Tobacco Bhd (BAT) and JTI raised retail selling prices of premium and value 20s pack by 30 sen, from RM9 to RM9.30 and from RM7.50 to RM7.80, respectively.

It expects JTI’s market share expansion to continue on the back of stronger brand equity going forward, as it becomes a dominant contender within the VFM segment.

The research house raised the stock to a higher fair value, upon fine-tuning its earnings by 1%-3% to reflect new pricing structures. “At current price, the stock offers a 20% total return, inclusive of a 7% dividend yield,” it said.

AmResearch maintained a hold on BAT with slightly higher fair value of RM46.80 (previously RM46.40), having fine-tuned its FY09-11 earnings forecast by 1%-3%, taking into account the recently implemented retail selling price structure for cigarettes.

“While BAT has been able to defend its dominant market share in the premium segment at 73%, its market share in the VFM segment is down eight percentage points to 36%,” it said, adding that it was maintaining a hold on BAT as the group’s stellar dividend track record and current dividend yield of 6% were still attractive.

“We are now more optimistic on the sector,” AmResearch said, but still maintaining a neutral stance on the sector.

“Admittedly, while absence of another punitive increase in excise duties this time around bodes well for tobacco manufacturers, we expect legitimate total industry volume (TIV) to continue falling, contracting 2%-3% per annum in FY10 and FY11,” it said.

AmResearch now anticipated a TIV contraction to be milder when compared to an anticipated 9%-10% year-on-year (y-o-y) decline for FY09. It said legitimate TIV had declined 11% y-o-y for 1H09, according to statistics by the Confederation of Malaysian Tobacco Manufacturers.

“We reckon better consumer sentiment coupled with the symbolic increase of one sen/stick should soften the impact going forward.”
At last Friday’s close, both BAT and JTI were flat at RM44.60 and RM4.65 respectively.

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Last Updated on Monday, 26 October 2009 14:21

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