Results

• Within expectations – Reported FY14 net profit of RM902.0m came in within expectations, accounted for 104.3% and 97.5% of ours and consensus’ full year earnings.

Deviations

• None.

Dividends

• Declared third interim dividend of 78 sen/share, bringing. FY14 total dividends to RM3.09, representing a payout and yield of 97.8% and 4.4%, respectively. Despite the higherthan- expected payout, we are keeping our payout assumption of 95% unchanged.

Highlights

• Volume: BAT’s domestic and duty free volumes grew 5.1% yoy in 4QFY14 while YTD declined by 3.7% yoy. We believe the increase of RM1.50/pack was no longer a shocking surprise to consumers as it was the second increase of the same quantum after Sept 2013.

• Financial performance: Despite the overall volume decline, FY14’s total revenue grew 6.2% yoy largely due to higher selling prices (full contribution from Sept 2013 price hike).

• Bottomline recorded a healthier growth of 9.5% on the back of additional productivity savings, partially offset by the increase in operating expenses.

• As for market shares by products, BAT’s market share declined 0.7ppts yoy mainly due to downtrading in the market and relatively weak performance by Pall Mall. Furthermore, pressure on premium-products was amplified when BAT raised another RM1.50/pack in Nov 2014.

• Dunhill recorded decline of 0.6ppts yoy in FY14 due to the loss from Dunhill Full Flavour. Pall Mall’s market remained relatively unchanged between 4.4-4.9%. However, Peter Stuyvesant’s market share have improved significantly in 4QFY14, bringing the average share for the segment to 4.3% (+1.1ppts).

• The tighter enforcements by Royal Malaysia Customs have proven to be effective and instrumental in driving a sharp 3.5ppts reduction of the share of illegal cigarettes trade from 35.8% in Wave 1, 2014 to 32.3% as recorded in the last reading in 2014 (Wave 2, 2014).

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) Potentialexcise duty hike; (3) High level of illicit cigarettes in the market; and (4) Prices already reflect fundamentals

Valuation

Maintain HOLD with unchanged TP of RM63.20 based on DCF valuations.

Source: Hong Leong Investment Bank Research - 17 Feb 2015