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Patria downgraded Philip Morris CR to hold from accumulate

17.4.2003 14:46
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We downgrade Philip Morris CR stock to hold from accumulate, as it trades near to our new fair-value estimate of CZK 11,800 per share (previously CZK 12,170). Despite appealing 2002 results, the medium-term outlook remains discouraging for Philip Morris CR, given expected excise-tax increases and stricter anti-smoking legislation.

* Philip Morris CR’s (PM CR) consolidated net profit increased by 11% in 2002 and the company recently announced a hefty dividend payment of CZK 1,448 per share (i.e., gross dividend yield of 12%). Despite this favorable development, which was mostly due to an appreciating Czech currency and declining material costs, the company faces adverse market conditions. Consolidated volume sales were stagnant last year and the medium-term outlook remains rather discouraging.

* The company’s medium term performance will be driven by expected increases in excise taxes on cigarettes and by stricter anti-smoking legislation in coming years. Czech Parliament recently approved restrictions on tobacco-products advertising and the Cabinet plans to restrict smoking at most public places. The first in a series of excise-tax increases is expected to take effect in July 2003.

* As Philip Morris CR stock currently trades near to our new target price of CZK 11,800 per share, we have downgraded our investment recommendation to hold from accumulate. Nevertheless, its recently increased liquidity, low volatility, and defensive characteristics all favor PM CR stock.

* Some possible implications of PM CR’s parent company’s (the Altria Group) and Philip Morris USA’s financial distress (related to American-based litigation) are considered in this report. Historically, neither Philip Morris USA’s nor the parent company’s results (nor related news) have significantly affected Philip Morris CR’s stock performance. The correlation between PM CR stock and Altria Group stock remains extremely low.

Jan Hajek


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