Philip Morris CR: Both a blessing and a curse (downgraded to HOLD)

In this report, we have downgraded Philip Morris CR (PMCR) to HOLD from Buy, with a new price target (PT) of CZK 17,000/share (from CZK 18,887), offering 10% upside potential. First, we have cut our forecasts on the production takeover from Philip Morris International (PMI) (from 8.7bn to 4.9bn), due to the reported weakness of HeatStick (HEET) sales by PMI. Second, we see limited margin upside potential from the strong 2017, as we believe the majority of the production takeover from the parent has been realised already (+20% yoy in 2017) and we forecast accelerating HEETs sales to cannibalise PMCR’s premium cigarette product offering. On the other hand, we expect the core revenues from the Czech Republic and Slovakia to remain flat in 2017-20E as we estimate planned excise tax hikes and brand consolidation to offset shipment erosion driven by the acceleration of iQOS and an overall combustible sales decline. We expect PMCR to pay out a DPS of CZK 1,128 from its 2018E profit and CZK 1,193 from 2019E, implying dividend yields of 7.3% and 7.7%, vs. its seven-year average yield of 8%, limiting the scope for a further rerating, in our view. The company trades at 2018/19E P/Es of 11.7x, implying 32% and 26% discounts vs. its peers and broadly on a par with its long-term averages.