Results

Dividends

• Declared final dividend of 78 sen/share, bringing FY15 total dividends to RM3.12, representing a payout and yield of 97.9% and 5.6%, respectively. Despite the higher-thanexpected payout, we are keeping our payout assumption of 95% unchanged.

Highlights

• Volume: BAT’s domestic and duty free volumes declined by 23% yoy in 4QFY15 and by 12.6% yoy in FY15. This decline is largely attributed to the low consumer sentiment induced by the GST in April and the subsequent price hikes and to a larger degree, the excise duty hike in Nov 15 of 36% in which cigarette prices were increased by RM3.20/20 stick pack or circa 23%.

• YTD Financial performance: The overall volume decline in FY15 resulted in revenues declining by 4.5% yoy. Bottomline grew by a flat 0.9% yoy on the back of additional productivity savings, lower operating expenses (-8.8% yoy) as well as higher selling prices (full contribution from series of price hikes in Nov 14, Apr 15 (GST) and Nov 15).

• As for market share by products, BAT’s FY15 market share increased by 0.9ppt yoy to 62.1%. This is attributable to the stability of the Dunhill brand, which only declined by 0.1ppt in a down trading environment. Meanwhile, market share of of the Peter Stuyvesant’s brand grew by 1.3ppts to 5.6% in FY15.

• The tighter enforcements by Royal Malaysia Customs have been instrumental in curtailing the share of illegal cigarettes trade. Despite this, illicits have increased by 1.9ppts from 32.8% in Wave 3, 2014 to 34.7% as recorded in the last reading in 2015 (Wave 2, 2015). We foresee that the share of illicit will gain some traction in the coming quarters due the large pricing gul f. Furthermore, we still believe that vaping is still taking market share from the tobacco industry.

Risks

• (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

• We made slight adjustments to our Opex assumptions for FY16.We also lowered our bearish assumpti ons on BA T’s volume from -18% to -15% for FY16. Consequently, EPS is increased by 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 slightly higher TP of RM54.57 as we roll forward our DCF valuations (WACC: 8.23%; TG 3.5%).