Results

Within expectations - Reported 1QFY13 net profit of RM204.2m was within expectations, accounting for 24.8% of HLIB’s estimate and 24.9% of consensus full year estimates.

Dividends

Declared first interim dividend of 68 sen/share (1QFY12: 65 sen/share), representing 95% payout or 1.1% yield. We are maintaining our dividend payout forecast of 95% for FY13.

Highlights

Qoq: Revenue were relatively flat (+0.2%), benefiting from a much higher volume under contract manufacturing (semifinished goods), which were able to offset the decline in domestic volume. Lower domestic volume impacted BAT’s gross profit (-6.4%) as margins were narrowed. However, net profit managed to register 3.8% growth due to 37% reduction in operating expenses.

Yoy: Revenue growth of 5.1% were mainly coming from higher contract manufacturing volume, albeit the revenue increase is impacted by the changed in costing model from toll to contract manufacturing in mid-2012. Lower recorded gross profit (-3.4%) but improved net profit (+5.0%) were due to the same reasons mentioned above.

In terms of market share, BAT continued to grow its momentum with 61.5% (+1ppt yoy). Dunhill continues to expand, with share of 47.1% vs. 46.0% in FY12. As for Pall Mall and Peter Stuyvesant, market share have been stable with a collective share of 8.5%, a slight decrease of 0.1ppt mainly coming from Pall Mall.

Despite the market growth, the overall tobacco market saw shrinkage of 6% following the Oct 2012 price increase of 20 sen/pack (1 sen/stick). This in turn resulted in an increase in illicit white with 1Q statistics at record high of 23.6%. This concerns the group as illicit whites are the direct competitor to the industry’s legal whites.

The overall market share for illicit cigarettes saw a decline as at FY12 mainly due to the declined in smuggled kreteks (- 2.5%) instead of smuggled whites (+0.9%). 2013’s Wave 1 numbers will only be released in May 2013.

Going forward, the group will be putting in efforts to continue its strong market share growth momentum. BAT remains cautiously optimistic about 2013 outlook given the level of illicit whites as well as potential ad-hoc excise duty hike in the near future.

Risks

(1) Exceptionally higher excise duty hike; (2) Increase in illicit trade volume; (3) Weaker-than-expected TIV; and (4) Regulation tightening.

Forecasts

Unchanged for FY13-14 and introducing FY15 forecasts.

Rating

HOLD

• Positives – (1) High dividend yield stocks; (2) Countercyclical share price pattern; (3) Oligopoly industry; and (4) Resilient earnings and low capex requirements.
• Negatives – (1) Highly regulated industry; (2) Potential excise duty hike; (3) High level of illicit cigarettes in the market; and (4) Prices already reflect fundamentals

Valuation

• Maintain HOLD with unchanged TP of RM56.19 based on DCF valuations.

Source: Hong Leong Investment Bank Research - 24 Apr 2013