Results

Within  expectations  –  Reported  9MFY14  net  profit  of RM714.6m  accounted  for  82.6%  and  79.2%  of  ours  and consensus’ full year earnings.   

We  deemed  this  to  be  in-line  as  we  expect  the  group  to record  weaker  4QFY14  results,  due  to  inventory -loading  in 3Q  on  the  back  of  excise  duty  hike  expectations  ahead  of Budget 2015.

Deviations

• None.

Dividends

• Declared  third  interim  dividend  of  78  sen/share,  bringing 9MFY14  total Dividends to  RM2.31,  representing  a  pay out and yield of 92.3% and  3.5%, respectively.

Highlights 

Volume:  BAT’s domestic and duty free  volumes declined by 7.3%  in  3QFY14,  and  6.2%  YTD.  The  quantum  of  decline were  larger  than  historical  patterns  which  we  believe  was largely due to the recent price hike by RM1/pack which came effective  on  8  Sept  2014  but  was  revised  back  two  weeks later.

Financial performance:  Despite the overall  volume decline, 9MFY14’s  total revenue grew 4.9%  yoy largely due to higher selling prices.

Bottomline  recorded  a healthier growth of  12.6% on the back of  additional  productivity  savings,  partially  offset  by  the increase in operating expenses.

As  for  market  shares  by  products  up  untill  Aug  ‘14,  BAT’s market share declined 0.4ppts yoy mainly due to downtrading in the market and relatively  weak performance  by Pall Mall.

Pall Mall showed a 0.7ppts decline yoy in  market share. On a positive  note,  brand  market  share  has  stabilized  since 1QFY14 and resealable  reloc feature was introduced in  July to build on the brand’s momentum.

Dunhill  faces  pressure  from  its  full  flavor  franchise  (-0.2ppts yoy) while Peter Stuy vesant continued its consistent growth, achieving  solid market share increase of 0.9ppts yoy.

The latest reading on illicits’ market share stands at 35.8%, a reduction of 3.1 -ppts from its peak of 38.9% in Wave 3, 2013. Despite  the  decline,  which  we  believe  was  due  to  the effective  raids  conducted  by  the  authorities,  it  is  still considered  relatively  high.

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  RM68.54  based  on DCF valuations.

Source: Hong Leong Investment Bank Research - 17 Oct 2014