JT INTERNATIONAL BERHAD (JTINTER) 26/2/214 Financial Year: 213 31-Dec-213 Latest Quarter: 31/12/213 Price: 6.27 Stock Category: Investment Grade Board: Main Board FBMKLCI: NO Industry: CONSUMER PRODUCTS Sub-Sector: TOBACCO COMPANIES Ownership: - Corporate Owned (Foreign) L. C. Chong is NOT an investment advisor nor a financial advisor, and no information provided here is to be interpreted as a suggestion to buy or sell securities. All figures in thousands of Ringgit Malaysia except per share values and ratios Click here to understand definition of some financial terms Prepared by: L. C. Chong Website: http://lcchong.wordpress.com L. C. Chong Page 1 of 5 http://lcchong.wordpress.com
JT INTERNATIONAL BERHAD FY213 31-12-213 Latest Rolling 4 Quarter Results 35 3 25 2 15 1 5 15.2 16 14 11.83 11.77 12 1 7.71 8 6 4 1.14 2 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Turnover Net Profit EPS Revenue and Earnings 1,4 1,2 1, 8 6 4 2 24 26 28 21 212 Revenue EBIT Net Income Balance Sheet 7 6 5 4 3 2 1 24 26 28 21 212 Total Assets Total Liabilities Total Equity Cash Flow 2 15 1 PER SHARE VALUE (CENTS) 8 6 4 2 1 5 15.% 1 5.% 1 5 24 24 26 CROIC 26 28 28 21 Gross Profit Margin 24 Valuation FCF/Sales 26 28 21 21 Debt Coverage (FCF) 212 212 212 8 6 4 2 15.% 1 5.% 3. 2. 1. DCF 3-Y 5-Y 1-Y Good 6% 7.58 7.66 7.69 Base 2% 6.85 6.68 6.33 Bad -2% 6.17 5.81 5.22 Ugly -6% 5.54 5.5 4.32 EY% Valuation R4Q-EPS FY14-EPS FY15-EPS Buy Under 5.64 5.79 6.18 Sell Above 6.56 6.73 7.19. 1 5 24 24 26 26 ROIC 28 28 21 Net Profit Margin 21 212 212 Cash Conversion Cycle Debt/Equity 5 24 26 28 21 212 Absolute P/E R4Q-EPS FY14-EPS FY15-EPS Fair Value 8.97 9.19 9.82 Buy Under 6.96 7.13 7.62 Operating Owner Earnings
Economic Moats Economic Moats: Narrow Cost Advantage - JTINTER enjoys very high gross profit margin which is consistently above 8% in the past 7 years. - JTINTER's net profit margin are quite steady which respectively ranged 9.5% - 11%, but this is lower than BAT. - FCF/Sales is also consistently above 5% as well, but this is lower than BAT. Switching Costs - I notice that smokers seldom switch brand Network Effect - JTI's market share improved to 19.6% (+.2ppt YoY) in 4Q13. The market share for both Mevius and Winston ticked up by.1ppt and.3ppt respectively despite the increase in smuggled white sales (+1% YoY, 15% QoQ) for the Oct to Dec 213 period. Intangible Assets Not available or no moat found Efficient Scale Not available or no moat found Growth Drivers & Risks/Challenges Growth Drivers - JTINTER stopped buying locally grown tobacco leaf from 1 Jan 213 and this will contribute to cost savings starting next year as imported tobacco leaf is about 3% cheaper than domestic tobacco leaf. - JTI's market share improved to 19.6% (+.2ppt YoY) in 4Q13. The market share for both Mevius and Winston ticked up by.1ppt and.3ppt respectively despite the increase in smuggled white sales (+1% YoY, 15% QoQ) for the Oct to Dec 213 period. - In a bid to combat the slide in legal volumes, management is focusing on product innovations and stepping up its marketing activities. The group had recently launched Mevius Airstream which provides smokers a fresh smoking experience by delivering the smoke differently. Risks/Challenges
- For the remainder of 213, JTI Malaysia expects the operating environment to remain challenging due to the continued impact of certain local brands selling below the government mandated minimum cigarette price and the high prevalence of illegal cigarettes. The incidence of illegal cigarettes remained high at 33.6% based on the results of the latest illegal cigarette study for the period March to May 213 (Source: Wave 1, 213, Illicit Cigarette Survey (ICS) commissioned by Confederation of Malaysian Tobacco Manufacturers). Comparing with the preceding study in October to December 212 (Wave 3,212), incidence of illegal cigarettes declined marginally by.2 percentage point, from 33.8% to 33.6%. - Although cigarette demand is widely considered to be inelastic, the presence of illicit sticks (~35% share of market) and ELPCs (4.2% share of market) have made duty-paid cigarettes more elastic than imagined. - JTINTER is pleased to hear that the Ministry of Health will be making possession of illegal cigarettes an offence under their regulations. Coupled with the continued intensified enforcement efforts by the Malaysian law enforcement agencies, the Group remains confident that the incidence of illegal cigarettes can be further reduced. - Sales volume for the legitimate industry had declined by 1% in 4QFY13 - Weaker-than-expected TIV. - Regulation tightening. - Exceptionally high excise duty hike. - Increase in illicit trade volume.
Strategy My View: - Market Timing - EY%: Buy below 6.18, sell above 7.19-5Y DCF: 6.68-7.66; 5Y RDCF: 1% growth rate - Note: The reason I use 121.72 as owner earnings (but not 117) is capex in FY13 (RM62,393,) is extremely high. Thus, I use average of capex from 28 to 212 to calculate owner earnings. I have to wait FY14 annual report in order to understand the reason. - JTINTER may be slightly under valued. - Recently, JTINTER dropped from 6.6 to 6.25 which is quite close to 6.18 (EY%) - Based on analysts' consensus, JTINTER's net cash may hit MYR1/share in FY15. JTINTER has, in the past, paid dividends of 15 to 75sen/share when its net cash reached MYR1/share. Its latest net cash stood at 43.8sen/share at end- Dec 213. - Analysts expect industry sales volume to contract by 6% in 214 and 215 respectively following the recent 14% hike in selling prices. Besides, JTINTER management expects operating environment to remain extremely challenging, primarily due to the hike in excise duty and cigarette prices. In addition, consumption is expected to be impacted by continued inflationary pressures and weak consumer sentiment. - JTINTER is one of the most defensive stocks in my equity holdings. - Looking at potentially high dividend payout in the future, as of writing, I have accumulated few lots of JTINTER at 6.38. Portfolio Strategy: Lump Sum + Top Up Averaging Down Method: - Dollar Cost/Value Averaging Portfolio Execution: - Buy and Monitor BUY1;BUY2;BUY3;BUY4;BUY5 Buying Basis: EPS QoQ Growth > 15% Price is below Intrinsic Value (DCF) Price is below Intrinsic Value (EY%) Price is below Intrinsic Value (Absolute PE) Price is below Intrinsic Value (DY%) Stock price breaks out of consolidation/dip on an uptrend. Company owner/directors, and major fund institutions heavily buying SELL6;SELL7;SELL8;SELL9;SELL1;SELL11;SELL12 Selling Basis: Quarterly EPS drop for 3 consecutive months. Price has risen too far from its intrinsic value (DCF) Price has risen too far from its intrinsic value (EY%) Price has risen too far from its intrinsic value (Absolute PE) Price has risen too far from its intrinsic value (DY%) Long term trend changed from bullish to bearish Company owner/directors, and major fund institutions heavily selling Fundamental of business turns unattractive or bad (bear cases) The current price is 3% away from my average holding price. Other good reasons stated in MorningStar's article. L. C. Chong Page 5 of 5 http://lcchong.wordpress.com