Results

Within expectations – Reported FY13 net profit of RM823.4m was within expectations, accounting for 100.8% of HLIB’s estimate and 98.9% of consensus full year estimates.

Dividends

Declared final dividend of 78 sen/share (4QFY12: 77 sen/share), totaling RM2.82 for FY13 (FY12: RM2.72), in-line with our estimates. This represents a payout of 97.8%, as well as yield of 4.7%.

Highlights

Growth in revenue (+3.5%) fully attributed to the increase in contract manufacturing volume. Despite the domestic price increases in June and October, these were not sufficient to mitigate the impact of domestic volume decline.

Net profit grew 3.2%, slightly lesser then revenue growth due to the impact of lower domestic volume, higher costs and higher effective tax rate but was partially offset by lower operating expenses.

BAT continues to grow in FY13 by recording a 1ppt gain in market share vs. FY12 to 62%. Once again, Dunhill achieved another record high with +1.3ppt in market share, closing FY13 with market share of 47.6%.

Dunhill Kretek however was a disappointed during the quarter, alongside with Pall Mall, whose market share continues to decline (-0.1ppt). Peter Stuyvesant experienced excellent performance with +0.5ppt vs. FY12.

As expected, illicit cigarettes (especially illicit whites) skyrocketed on its last wave (Wave 3) with market share of 38.9%. Do note that this is at the second highest level after Wave 1 in 2009 at 39.7%.

Management continued to have a cautious outlook for FY14 with expectation of a double-digit decline in volume (due to the increase in excise duty and selling prices). It is also warry about the effectiveness of the government’s action in minimizing illicit trades.

Beginning 1 Jan 14, BAT have increased the front panel pictorial health warnings of cigarette pack to 50% (from 40%) while the back panel remains at 60%, in compliant of the new regulatory measures.

Ministry of Health (MoH) also imposed a new law of penalizing smokers that are in possession of cigarette packs without pictorial health warnings, punishable by a fine not exceeding RM10,000 and/or 2 years’ imprisonment.

Risks

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

Forecasts

Largely 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 RM64.46 based on DCF valuations.

Source: Hong Leong Investment Bank Research - 20 Feb 2014