Results

Within expectations – Reported 1HFY13 net profit of RM415.0m was within expectations, accounting for 50.6% of HLIB’s estimate and 51.2% of consensus full year estimates.

Dividends

Declared second interim dividend of 68 sen/share (1QFY12: 65 sen/share), representing 93.7% payout or 2.3% yield. This is in line with our total dividend forecast of RM2.74, hence are maintaining our estimates for now.

Highlights

Market share: BAT continued to grow its momentum with 61.5% (+1ppt yoy). Dunhill continued to strengthen its position in the industry, recording a marginal growth of 0.3ppt in market share. It was the key driver to BAT’s market share growth as it was partially offset by the aggregate declines across the rest of the portfolio (-0.6ppt). Pall Mall’s and Peter Stuyvesant’s market share stayed resilient with a collective share of 8.2% (-0.5ppt yoy).

The group has been trying to improve its VFM brands via the re-launch of Pall mall Menthol Range in June 13 and innovation pack upgrade for Peter Stuyvesant in July 13. We expect to see marginal impact from these efforts in 2HFY13.

Given the contradicting yoy volume decline and growing market share, we believe the latter is at the expense of the market share of remaining players. The market remained weak from the high levels of illicit cigarettes (smuggled whites). Also, weakening in BAT’s volume is expected in 2H as a result of the increase of 30 sens/pack in June.

Illicit whites are still the major concern despite the two continuous declines (Wave 3 ’12 and Wave 1 ’13). Total illicits were down 0.2% in Wave 1 ’13, contributed by the 0.5ppt decline in whites, partially offset by the increase of kreteks by 0.3ppt.

BAT remained cautious with the outlook for 2HFY13. We are expecting the remaining 2 quarters to be flattish as well, with negative exposure to the potential excise duty hike.

Regulatory-wise, management highlighted that the reduction in tar and nicotine content will be done in 2 phases from current 20mg and 1.5mg tar and nicotine respectively to 15 mg and 1.25mg in Jan ’14 and 10mg and 1.0mg in June ’15. Pictorial health warnings on the front packaging would also be enlarged to 50% from current 40% in Jan ’14.

Risks

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

Forecasts

Unchanged.

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 higher TP of RM59.86 from RM56.19 based on DCF valuations, as we roll forward our valuations to FY14.

Source: Hong Leong Investment Bank Research - 26 Jul 2013