- We re-iterate our HOLD recommendation on British American Tobacco (M) Bhd (BAT) with an unchanged DCF-based fair value of RM56.60/share.

- At its AGM yesterday, BAT managing director Datuk William Toh highlighted the decline in illicit trades in 2012 to 34.5% from 36.1% in 2011. While we note that illicit trades have been on a downward trend since peaking at 37.5% in 2009, the figure was nonetheless rather high when compared to the region’s single-digit average.

- The fall, which mainly resulted from status quo excise duties of RM0.22/stick in the last 2 years and strong enforcement activities by authorities, has been a boon to legal volumes.

- After nearly a decade of lackadaisical volume expansion, BAT managed to grow its volume by 0.24% to 8.7bil sticks in FY12 while increasing, for the third consecutive year, its overall market share by 1.6ppts to 62.5%. This, however, paled in comparison to the 6% growth in total legitimate industry growth of 6%.

- We believe BAT’s volumes were also supported by the rise in contract manufacturing deals, which saw a 39% rise in volume in FY12. Toh was quoted as saying that revenue contribution from this business would expand by 2ppts to 15%. This is in-line with our belief that BAT is looking at expanding this business.

- While BAT has maintained its stance that excise duties will remain unchanged post the general election, we do not discount the possibility of a hike as the government will look to shore up its coffers to reduce its deficit.

- Meanwhile, theSun quoted Toh as saying that BAT has no plans to venture into the e-cigarette market at present. This comment comes after BAT’s parent company’s recent acquisition of an e-cigarette company, CN Creative Ltd.

- BAT is expected to announce its 1Q13 results on April 23. We expect a flattish performance by the group in FY13 on the back of increasing regulatory constraints. In addition, should the premium segment pie begin to shrink, BAT’s dominance in this segment could be threatened by industry peer Philip Morris International’s Marlboro, which has been quietly gaining market share.

Source: AmeSecurities