JTI ... May11

It is gaining attention from investors despite the numerous challenges the tobacco sector continues to face.

JTI’s share price has more than doubled from RM3 since 2008, which is a contrast to the perception that defensive stocks are usually less exciting in terms of share price movement. The cigarette maker’s generous dividend payments and capital repayments in recent years help sustain investing interest in JTI.

But what about the company’s earnings prospects, which determine how generous JTI could be in franking out dividend?

Fundamentally, JTI is sound, with cash and cash equivalents standing at RM235.1 million as at March 31.

Its latest first quarter from RM313.2 million to RM290.7 million, net profit still remained fairly steady at RM34.5 million compared with RM37.8 million for the previous year’s corresponding quarter.

The industry in general is facing hard times due to the increased percentage of illegal cigarettes, which have chipped away at legal total industry volume even as the government takes a tougher anti-smoking stance. Illegal cigarettes have seen their percentage increase since 2004. It hit a peak in 2009, making up 37.5% of the total market. Increased reinforcement has helped that number to decline slightly to 36.3% for 2010.

Most in the industry are concerned about the rising level of illicit cigarettes as the numbers continue to climb. While most are not planning to shift operations away from Malaysia yet, once the level reaches more than 50%, it will prove impossible for international tobacco companies to continue to manufacture here,” said an industry observer.

JTI’s cash pile could mean that the company is eyeing acquisition targets, possibly in the food and beverage segment, as its parent is also involved in similar ventures.