Results

• Above expectations – Reported 1HFY15 net profit of RM458.6m came above our estimates; however, they are within consensus estimates. The group’s net profit accounted for 56.8% and 48.7% of ours and cons ensus’ full yea r earnings.

Dividends

• Declared second interim dividend of 78 sen/share, bringing 1HFY15 total dividends to RM1.56 (1H14:RM1.53), representing a payout and yield of 97.1% and 2.4%, respectively.

Highlights

• Financial performance: Revenues recorded a decline of 14.6% qoq due to a correction off the back of pre GST stocking in 1Q15 and the subsequent vacuum in domestic volume in following period. The group was also penalized due to their uncompetitive price position post GST implementation, being the first tobacco player to raise prices. Recall that there was a lag in price increases by the other international players. Subsequently, bottom-line recorded a decline of 11.5% qoq versus the preceding quarter.

• Volume: The briefing centered on the extremely weak domestic volume performance of 1H15, declining by 9.5% vs. SPLY (Qoq: -11.8%). This is largely attributed to reasons as mentioned above and softer consumer demand due to weak market sentiments post GST implementation.

• Furthermore, contract manufacturing volume continues to decline due to lesser demand from international markets. YTD volumes declined 14.5% largely attributed to lower sales to Australia and South Korea.

• Consequently, we anticipate that illicit cigarettes would greatly benefit by the price disparity and lackluster consumer confidence post GST implementation. We would not be surprised should the Wave 1 2015 of illicit cigarettes’ (to be released soon) would report an increase in market share, from 32.8% in Wave 3 2014.

• Market share: In 2Q15, Dunhill managed to gain on its leadership with 47.1% (+0.7-ppt) market share in the industry. Peter Stuyvesant continues to benefit from down trading, recording a market share of 5.5% (+0.3-ppts) whilst Pall Mall recorded 4.6% market share (+0.1-ppts)

Risks

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

Forecasts

• Forecasts updated to account for increased prices since 29 July (passing the GST to the consumers) thus widening margins, we maintain our volume assumptions. FY15-16 EPS is higher by circa 6%.

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 higher TP of RM65.54 (previously RM63.20) based on DCF valuations, post earnings revision.

Source: Hong Leong Investment Bank Research - 29 Jul 2015