Results
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Within expectations – Reported 9MFY15 net profit of RM715.5m came in within our forecast and consensus estimate. The group’s net profit accounted for 76.6% and 76.4% of ours and consensus’ full year earnings.
Deviation
Dividends
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Declared third interim dividend of 78 sen/share, bringing 9MFY15 total dividends to RM2.34 (9M14: RM2.31), representing payout and yield of 93.3% and 3.6%, respectively.
Highlights
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Financial performance: Revenues recorded an increase of 6.8% qoq due to a partial recovery of a soft 2Q15. The group also benefited from the price increase at the end of June whereby they passed back a portion of the GST to consumers. Operating expenses were also signi ficantly lower by 29.3% qoq due to timing of marketing expenses. Subsequently, bottom-line recorded an increase of 19.3% versus the preceding quarter.
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YTD: Revenues declined by 2% yoy, the saving grace being the excise led price increase in November 2014 and GST pass back at the end of June. This resulted in a marginal bottom-line increase of 0.1%
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Volume: YTD domestic volumes remain weak, declining by 10% yoy. BAT slightly outperformed total domestic volume which declined by 10.9% yoy.
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Cont ract manufacturing volume continued to decline due to weaker demand from international markets. YTD volumes declined 22.8% yoy largely attributed to lower sales to Australia and South Korea.
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Outlook: Wave 1 2015 of illicit cigarettes’ study has not been released, however we are anticipating an increase from the 32.8% reported in Wave 3 2014. We are of the opinion that down-trading to value brands and illicit as well as switching to vaping are affecting industry volumes.
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Market share: YTD, Dunhill maintained its leadership with 46.9% (-0.1-ppt) market share in the industry. Peter Stuyvesant continues to benefit from down-trading, recording a market share of 5.5% (+1.1-ppts) whilst Pall Mall recorded 4.6% market share (+0.1-ppts)
Risks
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(1) Exceptionally higher excise duty hike; (2) Increase in illicit trade volume; (3) Weaker-than-expected TIV; and (4) Regulation tightening.(5) Vaping Industry
Forecasts
Rating
HOLD
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Posi tives – (1) High dividend yield stocks; (2) Countercyclical share price pattern; (3) Oligopoly industry; and (4) Resilient earnings and low capex requirements.
Negatives
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(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 RM65.54 based on DCF valuation.
Source: Hong Leong Investment Bank Research - 28 Oct 2015