Results

• Within expectations – Reported 1QFY15 net profit of RM243.4m accounted for 30.2% and 25.5% of ours and consensus’ full year earnings.

• We deemed this to be in line, this quarter benefited from pre- GST stocking up, we expect to see further weakness ahead as volume normalizes post stocking up and lower margins due to absorption of GST (reversal in pricing).

Dividends

• Declared fi rst interim dividend of 78 sen/share (1QFY14: 75 sen/share), representing a payout of 91.5%, as well as yield of 1.2%.

Highlights

• Yoy: Revenue grew 10.4% mainly from the increases in selling prices which were effective in Nov 2014 (excise hike). Domestic sales volume has declined 1.3% due to the higher selling prices, while cont ract manufacturing volume continue to decline 4.8% largely due to declining volumes sold to the Australian Market.

• Bottomline recorded growth of 8% on the back of better product mix and pricing which offsets the increase in operating expenditures due to timing di fferences as well as the impact of inflation on the overall costs structure.

• Qoq: Higher revenue (+5.7%) was mainly driven by strong domestic and duty free volume, which we believe is largely inflated on the back of advance purchasing ahead of GST implementation.

• Earnings grew further (+29.8%) principally attributed to lower operating expenses (due to timing dif ferences in marketing expenses) and one-off cost registered in 4QFY14 related to discontinuation of employee cigarette rations .

• BAT’s market share declined by (-1.1ppt) to 61.1% vs. FY14 with Dunhill full flavor franchise experiencing a decline of 0.6ppt vs. FY14, despite the launch of Dunhill Zest in January 2015. Nevertheless, Dunhill remained as the market leader with market share of 46.4%

• Peter Stuyvesant has maintained its growth with latest market share of 5.2%, which is due to down trading by consumers. Pall Mall on the other hand remained stable at share of 4.5%

• Wave 3, 2014 illicit cigarette market share indicated an increase of 5ppts to 32.8%, up from 32.3%. This is not a surprise as we have earlier expected the trend to increase following the significant price hike of RM1.50/20-stick pack, Nov 2014 due to excise duty hike.

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

• Posi tives – (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 RM63.20 based on DCF valuations.

Source: Hong Leong Investment Bank Research - 29 Apr 2015