(ROTH MK/SELL/RM47.06/Target: RM40.00)

BAT’s 1Q17 net profit was well below our and street estimates. Sales did not stage a recovery, declining 24.5% yoy and 8.3% qoq as illicit cigarette incidence spiked to 57.1% in Dec 16. Factoring in margin expansion from post-restructuring from 2H17, valuation is still expensive and yields at <5% are unappealing, given the regulatory risks associated with the tobacco industry. Downgrade to SELL and cut target price to RM40.00, implying 19x 2018F PE.

Source: UOB Kay Hian Research - 21 Apr 2017