OSK upgrades JTI to buy

JT International Bhd (JTI), the country’s second-biggest cigarette manufacturer, has earned an upgrade following the release of its first quarter (1Q) numbers, which came in within forecast.

This is despite a challenging wider landscape which had pushed tobacco industry volume down by an annual pace of 9% during the period due to the twin threats of tigher regulations and illicit cigarette trade.

In a note yesterday, OSK Research said it had revised upwards JTI’s revenue and net profit estimates by 11.4% and 3.4% respectively in FY09. This was prompted by the expansion of JTI’s market share to 18.6% in March this year from 17.1% a year earlier, helped mainly by its Winston cigarettes, acccording to data from the AC Nielsen Retail Audit report.

OSK also tweaked upwards its target price for JTI shares by almost 10% to RM5.05 from RM4.60, besides upgrading the stock to a buy from neutral.

“We await more details from JTI’s upcoming analyst briefing pertaining to its other brands performance, namely, its premium Mild 7 brand and VFM Camel. Although we revise up our revenue forecast by 11.4% in FY09, nonetheless, upon factoring for higher operating and marketing cost, we only revise up our net profit slightly by 3.4%,” said OSK which also raised its forecast for JTI FY10 net profit by 8.7%.

However, the research house maintained its lower dividend projections of 37 sen and 39 sen a share for FY09 and FY10 respectively, and assumes no special dividends will be declared following the tobacco firm’s recent capital repayment which incurred an outflow of RM196.2 million during the quarter in review.

JTI’s FY09’s 1Q net profit rose 7.3% to RM32.99 million from RM30.75 million a year earlier, helped by higher sales volume and prices of cigarettes. Revenue advanced 16% to RM291.5 million from RM251.32 million.

The tobacco firm’s net profit accounted for 31.8% of OSK’s and consensus estimates.

Against the preceding quarter, JTI’s revenue leapt 15.1% from RM253.2 million. JTI did not declare dividends during the quarter in review, following a 58 sen a share payout in FY08.

OSK’s existing assumptions indicated that JTI’s FY09 dividend payout would offer investors a gross dividend yield of 8.8%, derived from dividing annual dividends per share by the firm’s share price.

JTI was unchanged at RM4.20 yesterday.

“This assumption is on the back of a payout ratio at 67.8% — which is similar to its payout ratio during the years from 2003-2006 whereby no special dividends were declared,” OSK said.