On March 1st, the US Financial stock website Seekingalpha published an analysis article to comprehensively analyze the reasons, influence, and future possibilities of Tobacco giants, Opiia, to acquire independent electronic cigarettes. The following is the full text.

According to an article on Monday (February 27) on Monday (February 27), it is reported that Opi Asia Group Corporation (New York Stock Exchange code: MO) is acquiring US electronic cigarette manufacturers NJOY for high -level negotiations for US $ 2.75 billion Essence

Ochiya's stock price has fallen by about 10%in the past year. In February 2020, they raised their rating to the three years since the buying, and the stock only generated 20% of the income (including dividend):

We believe that the acquisition of NJOY for $ 2.75 billion is a wrong decision for Opiia.

Although disposable electronic cigarettes represent a category of rapid growth, other precedents to reduce risk products indicate that it is unlikely to catch up unless there is severe regulatory intervention. The price in the rumor is equivalent to 18 times the past sales, which is too high to us. Even if Aochiya's management cannot see the future of its American cigarette business, paying more dividends or acquisition of JUUL may be better utilized. Aochia's stock is still very cheap, the price -earnings ratio is 9.5 times, and the dividend yield is 8.1%. We temporarily maintain the buying rating.

For other tobacco stocks, Opi Asia's acquisition of NJOY has limited influence on British -American Tobacco (BTI), but it may have a slight negative impact on Feliporis (PM) and Empire brands (OTCQX: IMBBY).

Who is NJOY?

NJOY HOLDINGS is a private US e -cigarette manufacturer and currently ranks third in the US electronic cigarette market.

NJOY's business first ranked second in emerging markets in 2011-12, and then collapsed due to poor product release, the combination of regulatory costs and patent proceedings, and announced in 2016 that chapter 11 was bankrupt:

NJOY got out of bankruptcy protection in 2017 and has since been held by hedge fund Mudrick Capital.

NJOY has two main products, a disposable electronic cigarette called NJOY DAILY and a filling electronic cigarette called NJOY ACE.

According to Nielsen data, according to sales, NJOY's share in the US steam market is about 3%. Analysts estimate that NJOY's sales from 2022 will be about $ 150 million. We believe that NJOY's sales are mainly in the United States.

The unusualness of NJOY is that so far, both NJOY DAILY and NJOY ACE's tobacco varieties have obtained the only FDA marketing authorization order ("MGO").

British American Tobacco (hereinafter referred to as "BAT") only received MGOs because of its less popular VULO, VIBE, and CIRO, and both Imperial Brands and Jum have received marketing rejection of their products. Products are still in progress during sales.

Some Logic products from Japan Tobacco Company (OTCPK: JAPAY) also received MGO, but these are insignificant.

Disposable electronic cigarettes represent a category of rapid growth. According to British and American tobacco estimates, by 2022, disposable supplies will account for 21.6%of the US steam market, 72.9%in the UK, and 34.1%in France. (In Germany, according to the value of retail value, Vapor only accounts for only 1%of the nicotine market, and it is insignificant.)

BAT estimates that according to BAT's net sales of 949 million pounds ($ 1.1 billion) in 2022, one -time cigarette income in the United States is about $ 600 million (after deducting consumption tax), and the total revenue of the steam category is US $ 2.75 billion Essence It means that NJOY's 3% sales share revenue is only 800-85 million US dollars, assuming its price is consistent with the market. .

Most other tobacco companies have recently launched their own disposable products, including BAT's VUSE GO (May 2022), Veeba (second quarter of 2022), and Imperial Brands's Blu Bar (November 2022 To. However, these products lack FDA authorization and may not be available in the United States for a period of time.

NJOY may keep a distance

We believe that NJOY may not lead to lead in the US market unless there is severe regulatory intervention.

According to Nielson data, NJOY's sales share in the United States is about 3%. Given the inherent limitations of Nielsen data, NJOY's market share may actually be much higher.

As of the fourth quarter of 2022, the value of BAT's VUSE was 45.8 %, while Juul's estimated value share was 26 %.

The precedent for other risk -lowering products indicates that NJOY is unlikely to catch up, even if it is under the ownership of Aochia.

The US Nicotine bag (calculated by value, currently 3%of the Nicotine market in the United States) is the best example, especially when the existing enterprises are purchased there to use the category leader Swedish Match (off -site transaction code: SWMAY) Zyn In competition. Aochia spent $ 372 million to acquire ON! 80% of the shares. In 2019, BAT also acquired Dryft's modern oral tobacco business in 2020. Despite these acquisitions, and subsequent active marketing and price promotion, Zyn continues to occupy the dominant position:

As of the fourth quarter of 2022, Zyn's sales share in Nicotine bags in the United States was 67.5%, with a value share of 75.7%; Aochia had a 23%share, and the BAT share had fallen to 4.9%.

Similarly, in the field of heating tobacco, Philip Morris continued to dominate this category, and the income of this category was almost 8 times that British and American tobacco was 8 times ($ 9.919 billion in £ 1.06 billion) in 2022.

It is difficult for new entrants to win among low -risk products, with strong qualitative reasons, such as brand awareness, consumer loyalty and scale advantages. In fact, it turns out that it is difficult for new entrants to challenge consumer franchise rights of various industries (soft drinks, coffee, beer, etc.). We believe that the reason is structural. We expect NJOY to face the same obstacles facing the new entryrs in the entire consumer field.

In our opinion, severe regulatory intervention is the only scene that NJOY can catch up with. If Vuse and Jum are forced to withdraw from the market in some way, you can imagine that NJOY will become a winner.

However, we believe that it is impossible for Vuse and Juul to be legal, nor is it the expected result of the FDA. In addition, FDA's experience in intervention in Gaiang electronic cigarette products at the end of 2019 shows that cigarettes may eventually become greater beneficiaries.

In any case, a complete ban may take several months or even years to implement. At that time, the GLO of IQOS and BAT may have been listed in the United States and provide a more ideal alternative than NJOY products.

It is rumored that NJOY is high valuation

According to reports, Opi Asia is willing to pay for NJOY's valuation.

Based on the overall price of US $ 2.75 billion, even before the profit of $ 500 million, Opi Asia will pay 18 times the sales of NJOY 2022 (about $ 150 million). NJOY may lose money.

In 2018, Aochiya paid about 25 times the price of JUul's 35% of the shares of JUul and the total valuation of $ 38 billion in 2018, and it was reported that JUUL's revenue was about 1.5 billion US dollars.

Compared with the acquisition of Swedish matches in Felipimris, this price looks too high. At that time, its initial offer of US $ 17.5 billion was equivalent to 8 times sales of Swedish matches in 2021 (the later higher quotation only reflects the strong US dollar). Although one -third of the sales comes from American cigar business from Swedish Match.

Buying NJOY will be a bad capital allocation

Our basic situation is that the decline in the US cigarette market will remain mild, at least in the middle period. In this case, given the low valuation of Opi Asia, the best use of excess capital is to repurchase Ochiya shares. Aochia plans to repurchase $ 1 billion in 2023, less than $ 1.8 billion in 2022. Although it is part of the US IQOS rights agreement, Opi Asia is expected to get another 1.7 billion other in July from Philipmorris Company US dollar (plus interest). (A $ 1 billion was received in October 2022.)

Even if Opi Asia's management cannot see the future of its American cigarette business, acquiring NJOY does not mean good use of capital, because we think NJOY is too expensive, loses, and unlikely to catch up with competitors. Capital allocation decisions should comply with the interests of shareholders. It is best to obtain any remaining profits from the cigarette business in the form of dividends.

To put it plainly, buying NJOY may be an example of "we must do something, this is something, so we must do this" wrong logic.

Given the size of JUUL is several times that of NJOY, even if the acquisition of JUUL may be a better way of capital utilization. Opiya itself is now valued at JUUL's equity of US $ 714 million. Even if it includes a premium and a debt of $ 1 billion, it may acquire the remaining shares of JUul for less than $ 2 billion.

Unfortunately, it is reported that Opi Asia plans to peel off Juul's shares as part of the acquisition of NJOY. Last September, it had abandoned the right to purchase at JUUL.

Impact on other competitors

If Opiia acquires NJOY and assumes that BAT's Vuse and JUul stay in the US market, the impact on British and American tobacco has a limited impact, but it has a slight negative impact on Feliporris and Empire brands.

BAT's VUSE is currently ranked first in VAPOR in the United States, although its VUSE GO once -sex product has not yet entered the US market. BAT also has the size of any additional resources that match Ogya that may invest in NJOY. If Ozya has NJOY, we think BAT's competitive position will not be significantly affected.

Philipmoris will not obtain the right of IQOS heating tobacco in the United States until April 2024, and only plans to submit PMTA, which submits its Veev Vapor products in the second half of 2023. The danger of Photo International is that the VAPOR product of competitors may occupy too much Reduced Risk in the United States to sell the product space before IQOS or Veev starts there. We believe that the low -risk product market has path dependence, so powerful steam categories may first appear heating tobacco categories.

For example, in the two largest Vapor markets in Europe, the share of IQOS in the British nicotine market is only 3.3%, and its share in France has not been disclosed (and may be insignificant).

However, in any case, Zyn may continue to grow strongly in the United States, and PM has no cigarette sales in the United States. Therefore, even if NJOY has something to do, the impact on PM is very small. If Ozya dives off its shares, PM can even strengthen its capabilities in the United States by acquiring Jum.

Imperial Brands's BLU ranks fourth in the US steam market and has received FDA's MDO (the company is appealing this). A stronger NJOY may damage the sales of blue smoke and cigarettes.

Ozya stock valuation

Compared to 2022, Opi Asia's stock price was $ 46.54, the price -earnings ratio was 9.5 times, and the yield of free cash flow ("FCF") was 10.2%

Aochiya valuation and cash flow (2018-22)

Compared with the midpoint ($ 4.98 to $ 5.13) for the revenue guidelines per share in 2023, Aochia's P / E ratio multiple is 9.2 times.

The dividend yield was 8.1%, and the dividend of 0.94 US dollars per quarter (an annualized $ 3.76), which increased by 4.4%in August 2022. Aochiya's goal is to pay 80%.

The total debt / EBITDA of Aochia at the end of 2022 was 2.1 times, and the cash was $ 4. billion (Philipmoris will provide another $ 1.7 billion in July). The price of NJOY 2.75 billion in NJOY will be provided by hand cash by hand, and will not change the total debt/EBITDA ratio. Net debt/EBITDA will increase from 1.8 times to 2.0 times.

Opi Ya stock forecast

We keep prediction assumptions unchanged:

In 2023, earnings per share were $ 5.06, and the outlook was medium value

Since 2024, net income has increased by 4%

The number of shares will be reduced by 1%in 2023, and then a year from 2024 will decrease by 2%per year

The dividend rate reaches 80%

At the end of 2025, the Progressive Property ratio was 9.5 times

Our new 2025 earnings per share is still $ 5.69:

Explanatory Opi Ya returns prediction

The stock price is $ 46.54. We expect to withdraw at $ 54, and by the end of 2025, the total return rate is 46%(annualized 16.4%).

The acquisition of NJOY may dilute the income per share, at least at the beginning.

These numbers reflect our basic situation, that is, our views on what is most likely to happen. However, there is a major tail risk. The unfavorable side is that since 2024, Philipmoris may quickly and significantly occupy the share of the US market; from a positive point of view, if the US cigarette market remains uncomfortable, there will be significant upward space.

Is Opi Asia stock worth buying?

NJOY ranks third in US Vapor, and it may not be able to resolve Opi Asia's strategic challenges.

The acquisition of NJOY may mean another example of the management of management on the American cigarette business and prove that the capital allocation is improper.

We still expect that the decline in the US cigarette market will be relatively mild. However, even if the decline is accelerated, it does not mean that buying NJOY is a good investment. More dividends will benefit shareholders.

Aochia's stock is still very cheap, with a price -earnings ratio of 9.5 times and the dividend yield of 8.1%.

We temporarily reiterate our buying rating, but we will pay close attention to the company.