Even as we approach the last week of the year, the outlook for the market going into 2012 remains hazy. Uncertainties persist over the eurozone sovereign debt crisis and its impact on the global economy. Against this backdrop, volatility is likely here to stay for some time yet.
As such, we suspect a good number of investors will likely retain a high percentage of cash in their portfolios pending greater clarity. Staying on the sidelines now will also allow investors to take advantage of any major market selloff in the coming months should global financial events take a turn for the worst. For others who are risk-averse but still keen to stay in the market, defensive stocks with higher than market average yields appear to be the preferred option. And they have been rewarded.
Case in point, the special dividend of 60 sen per share announced by Guinness Anchor Bhd (GAB) earlier this month sent its stock price sharply higher. For the year-to-date, its shares have outperformed the FBM KLCI by some distance — gaining more than 35% compared with the benchmark index’s 1.5% decline (up till last Friday).
GAB is sitting on a pile of cash and will distribute part of the money back to shareholders after taking into account the limited opportunity for expansion as well as any fresh acquisitions. Taking on some debt and shrinking shareholders’ funds will enhance the company’s return on equity. GAB’s bumper dividend also shines a spotlight on other similarly cash-rich companies with relatively steady cash flow from operations which could potentially mimic such a move.
JT International Bhd (JTI), we believe, may be a good example. The cigarette manufacturer had cash totalling nearly RM190 million as at end-September and no borrowings.
Minimal capex frees up cash flow for distribution
We do not expect any major capital expansion plans in the near to medium term given the challenging outlook for the industry. Total industry volume sales have fallen for seven straight years since 2003. In the first nine months of this year, volume sales for duty-paid cigarettes contracted by a further 3% year-on-year (y-o-y). The decline is due primarily to the annual tax hikes and resulting increases in selling prices as well as the rise in illicit trade.
The trade in illegal cigarettes in the country now stands at about 37.3%.
Positively, sales may regain some traction in 4Q11, in the absence of an additional tax hike in Budget 2012. But total volume sales growth for the year is likely to remain in the red.
Thus, with minimal capex expected, JTI may well decide to return part of its cash to shareholders. Its track record is supportive of such a move.
Sitting on a rising pile of cash
In 2007 and 2008, JTI paid special dividends of 15 sen and 28 sen per share, in addition to the “regular” annual gross dividends of 30 sen per share. In 2009, the company made a 75 sen per share capital repayment.
There was no special dividend in 2010, most likely in view of the bumper payout in the previous year. Its cash dropped to RM125 million at end-2009, from RM267 million at end-2008, but has since been rising anew. Therefore, there is a good chance that total dividends this year will improve over the 30 sen per share paid in 2010.
JTI has already paid gross dividends totalling 30 sen per share in 1H11. We believe there could be one more round of dividends for 4Q11. Assuming a final dividend of 15 sen per share, net yield will total 4.9% for the year at the prevailing share price of RM6.90.
The estimated total dividends of 45 sen per share would be equivalent to a profit payout of roughly 68% based on our earnings forecast. We believe this is a fairly conservative payout ratio given the company’s cash position and expected cash flow from operations. There is certainly room for surprises on the upside.
Earnings expected to remain resilient
Despite declining volume sales, JTI’s earnings have trended higher — growing at an annual compound rate of just under 10% from 2003 to 2010. This is attributed to higher selling prices and various cost rationalisation exercises. Hence, we expect earnings and cash flow will remain fairly resilient.
The company reported a relatively solid set of earnings results for 3Q11. Turnover was up 6% y-o-y while net profit expanded by 13.1% to RM39.8 million. This brings net earnings for the first nine months of the year to RM104.7 million, down by just about 1.6% from the previous corresponding period.
For the full year, we estimate net profit of RM130.5 million, slightly lower than the RM133.8 million in 2010, but this will improve to RM138.9 million in 2012. Industry volume sales outlook is more positive in the absence of an additional tax hike this year.
Based on our forecast earnings, the stock is trading at fairly attractive valuations of roughly 13 times 2012 — compared with that of British American Tobacco (M) Bhd. Assuming total dividends of 50 sen per share next year, investors will earn a net yield of 5.4%.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, December 28, 2011.
As such, we suspect a good number of investors will likely retain a high percentage of cash in their portfolios pending greater clarity. Staying on the sidelines now will also allow investors to take advantage of any major market selloff in the coming months should global financial events take a turn for the worst. For others who are risk-averse but still keen to stay in the market, defensive stocks with higher than market average yields appear to be the preferred option. And they have been rewarded.
Case in point, the special dividend of 60 sen per share announced by Guinness Anchor Bhd (GAB) earlier this month sent its stock price sharply higher. For the year-to-date, its shares have outperformed the FBM KLCI by some distance — gaining more than 35% compared with the benchmark index’s 1.5% decline (up till last Friday).
GAB is sitting on a pile of cash and will distribute part of the money back to shareholders after taking into account the limited opportunity for expansion as well as any fresh acquisitions. Taking on some debt and shrinking shareholders’ funds will enhance the company’s return on equity. GAB’s bumper dividend also shines a spotlight on other similarly cash-rich companies with relatively steady cash flow from operations which could potentially mimic such a move.
JT International Bhd (JTI), we believe, may be a good example. The cigarette manufacturer had cash totalling nearly RM190 million as at end-September and no borrowings.
Minimal capex frees up cash flow for distribution
We do not expect any major capital expansion plans in the near to medium term given the challenging outlook for the industry. Total industry volume sales have fallen for seven straight years since 2003. In the first nine months of this year, volume sales for duty-paid cigarettes contracted by a further 3% year-on-year (y-o-y). The decline is due primarily to the annual tax hikes and resulting increases in selling prices as well as the rise in illicit trade.
The trade in illegal cigarettes in the country now stands at about 37.3%.
Positively, sales may regain some traction in 4Q11, in the absence of an additional tax hike in Budget 2012. But total volume sales growth for the year is likely to remain in the red.
Thus, with minimal capex expected, JTI may well decide to return part of its cash to shareholders. Its track record is supportive of such a move.
Sitting on a rising pile of cash
In 2007 and 2008, JTI paid special dividends of 15 sen and 28 sen per share, in addition to the “regular” annual gross dividends of 30 sen per share. In 2009, the company made a 75 sen per share capital repayment.
There was no special dividend in 2010, most likely in view of the bumper payout in the previous year. Its cash dropped to RM125 million at end-2009, from RM267 million at end-2008, but has since been rising anew. Therefore, there is a good chance that total dividends this year will improve over the 30 sen per share paid in 2010.
JTI has already paid gross dividends totalling 30 sen per share in 1H11. We believe there could be one more round of dividends for 4Q11. Assuming a final dividend of 15 sen per share, net yield will total 4.9% for the year at the prevailing share price of RM6.90.
The estimated total dividends of 45 sen per share would be equivalent to a profit payout of roughly 68% based on our earnings forecast. We believe this is a fairly conservative payout ratio given the company’s cash position and expected cash flow from operations. There is certainly room for surprises on the upside.
Earnings expected to remain resilient
Despite declining volume sales, JTI’s earnings have trended higher — growing at an annual compound rate of just under 10% from 2003 to 2010. This is attributed to higher selling prices and various cost rationalisation exercises. Hence, we expect earnings and cash flow will remain fairly resilient.
The company reported a relatively solid set of earnings results for 3Q11. Turnover was up 6% y-o-y while net profit expanded by 13.1% to RM39.8 million. This brings net earnings for the first nine months of the year to RM104.7 million, down by just about 1.6% from the previous corresponding period.
For the full year, we estimate net profit of RM130.5 million, slightly lower than the RM133.8 million in 2010, but this will improve to RM138.9 million in 2012. Industry volume sales outlook is more positive in the absence of an additional tax hike this year.
Based on our forecast earnings, the stock is trading at fairly attractive valuations of roughly 13 times 2012 — compared with that of British American Tobacco (M) Bhd. Assuming total dividends of 50 sen per share next year, investors will earn a net yield of 5.4%.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, December 28, 2011.
