BAT’s 1H18 core PAT of RM206.4m (QoQ: +14.5%, YoY: -27.3%) was broadly in line with ours and consensus expectations. Going forward, we expect better margins from “zerorisation” of GST and growth in volumes due to Pakatan Harapans’s plan to curb illicit market. We leave our forecasts unchanged. Maintain BUY call with unchanged TP of RM37.00 based on DCF valuation methodology (WACC: 8.2%; TG: 3.0%)

In line. Reported 1H18 core PAT of RM206.4m was broadly in-line with ours and consensus expectations, accounting for 40.2% and 41.9% of full year forecasts respectively. We consider this in line as we expect BAT to experience a better 3Q due to the absence of sales tax between June and September, which would see BAT benefit from better margins (as shelf prices have remained unchanged).

Dividend. 35 sen per share going ex on 1 Aug 2018.was declared, bringing YTD dividend to 68 sen. (6M17: 83 sen).

QoQ: Core PAT grew 14.5% to RM110.1m in tandem with top line growth of 6.5%. The better performance was due to increasing efficiencies at the manufacturing level as well as one month of “zerorised” GST.

YoY: Core PAT decreased by 27.3% from RM151.6m to RM110.1m due to lesser top line, as a result of higher illicit market share, which resulted in lower volumes.

YTD: Core PAT was lower by 24.1% at RM206.4m due to reasons mentioned above, despite BAT’s higher share of legal volumes. However, lower revenue were partially cushioned by lower operating expenses of RM118.6m vs RM128.9 last year. BAT explained that lower operating expenses were due to lower staff, overhead and marketing cost.

Market share: BAT’s market share of the total legal market was 57.8% YTD (up from 56.5%). Crucially, Dunhill grew YTD to 40.3% of the total legal market from 40.0%. Dunhill’s VFM brand ‘Rothmans’, which was launched late last year, currently makes up 3.3% of the legal market.

Prospects: “Zerorisation” of GST from 1 June 2018 should lead to better margins in 3Q as BAT was not permitted to lower shelf prices. Additionally, BAT is optimistic that the newly elected government will increase efforts in curbing the illicit market. Pakatan Harapan’s (PH) alternative 2018 budget states the newly elected government intends to collect RM6.1bn in cigarette excise duty vs RM3.5bn estimated by the previous administration. We expect the new government to step up efforts to curb illicit cigarette trade, in turn boosting legal market volumes, and hence increasing excise duty tax collection in order to partially fill the tax gap from the GST-SST migration.

Forecast. Unchanged.

Maintain BUY, TP: RM37.00. We maintain our DCF based TP of RM37.00 and BUY call (WACC: 8.2%; TG 3.0%).

Source: Hong Leong Investment Bank Research - 20 Jul 2018