-  We maintain our HOLD recommendation on British American Tobacco (M) (BAT) with an unchanged DCF-based fair value of RM62.00/share.

-  BAT reported 3QFY13 earnings of RM219mil, bringing cumulative earnings for the first 9 months of FY13F to RM634mil (YoY: +5.5%). This accounted for 78% of our recently revised full year forecast and 77% of consensus, which we deem to be in line.

-  The 9MFY13 YoY net profit improvement can be largely attributed to:- (1) revenue growth of 4.7% following an increase in YTD contract manufacturing volumes (+21% YoY); and (2) lower operating expenses (-13% YoY) as leaf restructuring costs (RM13mil) were more than offset by lower IT and marketing expenses.

-  On a sequential basis, BAT’s 3QFY13 earnings rose by 4% as the 30sen/pack hike in June 2013 compensated for the drop in contract manufacturing volumes (-14% QoQ). Overall, QoQ and YoY EBIT margins remained stable at ~25%.

-  Although we are not privy to Sept 2013’s volumes, we believe that pre-budget stock loading activities this year remained suppressed – a trend similarly seen last year. BAT’s total domestic volumes for Jan-Aug 2013 are down by 4.8% (YTD June: -5%). This compares to total legal TIV’s decline of 2.9% (YTD Aug) and 2.7% (1HFY13).

-  The only hint of any stockpiling was during the weekend of the excise duty hike announcement. We understand that ~100mil sticks of cigarettes were snapped up, effectively shifting ~4% of 4QFY13’s sales into 3QFY13.

-  Recall that Budget 2014 would be tabled on Oct 25 but a hike in tobacco excise duty was already announced on Sept 27. In response to the 3sen/stick (14%) rise in excise, the tobacco manufacturers have raised prices by RM1.50/pack of 20s. We do not expect further increases in excise duties this year.

-  The group retained its dominant position in the premium market (72.3% share) on the back of a 1.2ppt YTD growth of its Dunhill range, which it recently extended with the nationwide rollout of Dunhill Kretek in Sept 2013. Its Aspirational Premium brands also held steady, resulting in the group’s overall market share inching up by 0.8ppts to 61.8% for 9MFY13.

-  As expected, management declared a tax-exempt, single-tier 3rd interim dividend of 68 sen/share. Total dividends YTD stand at RM2.04/share, making up 75% of our FY13F DPS forecast.

-  Despite the group’s muted earnings growth and the lack of positive catalysts in the industry, we believe the stock will continue to be of interest to income investors as well as those who seek defensive attributes in their equity holdings.

Source: AmeSecurities