Highlights

• In an announcement yesterday, BAT Malaysia Sdn Bhd and LGB Properties (M) Sdn Bhd has entered into a conditional sale and purchase agreement for the land parcel located at Virginia Park, Jalan Universiti, 46200 PJ, Selangor.

• The proposed disposal was conducted by way of a public tender exercise that was closed on the 29th of April. This announcement is a follow up to the announcement of the cessation of its factory operations in Malaysia on the 18th of March 2016.

• The market value of the land parcels & buildings as appraised by Messrs. DTZ Nawawi Tie Leung Property Consultants on 22 April 2016 amounts to RM262.5m.

• The purchase consideration amounts to RM218m and was arrived on the basis of “willing buyer and willing seller”. Comments

• The disposal price equates to a sale price of RM382 psf. We believe the disposal was at the lower end of fai r value given that our channel check indicates that transactions in the area were priced between RM300-500 psf.

• Based on the disposal price, the expected net gain to the BAT arising from the disposal is circa RM148.8m after taking into account (i) the audited net book value of RM59.2m; (ii) expenses incurred for the sale of property of RM2.2m; and (iii) the RPGT of RM7.8m.

• The disposal translates into an increase in FY16 EPS by approximately 0.52sen a share. This will boost our projected FY16 EPS of 264.83 sen by 19.7% to 316.9 sen.

• Management will review and determine by years end on how to utilize the proceeds. If we assume that the full net gain of RM148m is paid out as dividends this will equate to RM0.52 sen/share; boosting out forecasted dividend payout by 20% to RM3.04/share from RM2.52/share. This will enhance dividend yield to 6% from 5%.

Forecasts

• Unchanged, as the disposal of the factory is merely the start of the structural evolution of BAT Malaysia. The gain on disposal is a one off gain. We are keener on the potential cost savings and effects on margins as a result of this structural shift which is not reflected in this announcement.

Risks

• to the stock stems from the exceptionally high rates of illicit cigarettes in the market and regulatory risks such as excise duty hikes and potential plain packaging laws. Furthermore, the advent of vapor products has also taken market share from traditional tobacco.

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

Valuation

We upgrade to a HOLD from a SELL given the recent share price movement. We maintain our TP at RM50.47.

Source: Hong Leong Investment Bank Research - 9 Jun 2016