Results

Within expectations – Reported 9MFY13 net profit of RM634.4m was within expectations, accounting for 77.1% of HLIB’s estimate and 76.9% of consensus full year estimates. We expect 4Q results to weaken as we foresee that volume would decline (double-digit) over the short term in view of the recent price increase.

Dividends

Declared third interim dividend of 68 sen/share (3QFY12: 65 sen/share), totaling RM2.04 for 9MFY13. This represents a payout of 91.9%, in line with the group’s policy of >90%, as well as yield of 3.2%.

Highlights

YTD revenue experienced slight growth on the back of the increase in contract manufacturing. Bottomline improved further due to foreign exchange gains, lower IT costs and marketing costs as well as lower interest rate charged (by 25%) compared to prior year.

BAT maintained its strong market share performance through Jul and Aug (Sept statistics not released), further edging forward to 61.8%. Unsurprisingly, Dunhill continues to be the main growth engine with 1.5ppts increase yoy.

The group has also launched Dunhill Kretek (imported from Indonesia). Dunhill Kretek is the first Premium Kretek in the market, although yet to register any market share result. However, we believe its market share to be insignificant.

Peter Stuyvesant, buoyed by its recent upgrade, managed to maintain its market share of circa 3.1%, whereas Pall Mall and other brands have all declined, collectively down by 0.6ppts yoy. One factor supporting Peter Stuyvesant’s market share could be the upgrade it its packaging, which was done in 3Q, together with the introduction of a freshness seal.

As for illicit cigarettes, new readings on Wave 2 have not been released. For Wave 1, its market share stands at 33.6%, where illicit whites constitute 23% while the remaining is held by illicit kreteks. Thus, illicits remains a large concern to both government and tobacco players.

Going forward, the group has a cautious outlook on the next quarter and the year ahead (FY14) following the higher-thanexpected quantum in excise duty hike (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 unchanged TP of RM59.86 based on DCF valuations.

Source: Hong Leong Investment Bank Research - 18 Oct 2013