1Q21 core PAT of RM63.1m (QoQ: -18.7%, YoY: +14.7%) was in line with ours and consensus estimates, at 27.3% and 23.3% of forecasts respectively. Our forecasts remain unchanged. While earnings was in line with our forecasts, we reckon BAT’s share price has risen to an unjustified level given the earnings uncertainty from (i) chronic high illicit market share, (ii) growth in unregulated vape products and (iii) consumers down trading to VFM brands. Our TP of RM11.75 based on a DCF valuation methodology (WACC: 9.5%, 2.5%) remains unchanged. Downgrade to SELL.

In line. 1Q21 core PAT of RM63.1m (QoQ: -18.7%, YoY: -14.7%) was in line with ours and consensus estimates, at 27.3% and 23.3% of forecasts respectively.

Dividend. Declared DPS of 21 sen goes ex on 15 Jun 2021. 1Q21 DPS: 17 sen.

QoQ. Core PAT declined -18.7% in tandem with lower revenue of -14.2%. While BAT’s share of the market was flat at 52.3% QoQ, sales volumes were lower as a result of seasonality. BAT shared that Dunhill’s share of the premium segment grew by 1.1ppt to 61.2% while Rothmans and KYO share of the Value-for-Money (VFM) market was stable at 10%.

YoY. Higher revenue (+17.8%) was due to growth in overall industry sales volumes (+19%). BAT shared that higher sales volumes may be due to measures introduced in Budget 2021, which included stricter tobacco transhipment regulation to counter black market activity. BAT shared that market share of 52.3% represented an increase of 1.9ppt YoY, which was due to increase in market share of all brands in their respective categories. Dunhill (premium) +3.6ppt, Peter Stuyvesant and Pall Mall (aspirational) +0.8ppt, Rothmans and KYO (VFM) +4.1ppt. All-in-all, core PATAMI increased +14.7% in tandem with higher sales.

Prospects. While higher revenue YoY (+17.8%) which was in line with increased legal volumes (+19%) may seem promising, this was due to a low base effect (note that 1Q20 revenue figure was the lowest figure recorded by BAT in over ten years). Two large hurdles still remain for BAT, namely (i) the rise in vape users, which is estimated to account for >10% of the total market in Malaysia and (ii) consumers continuing to downtrend to VFM brands. Note that VFM brands cost the same to produce but are sold at lower prices, resulting in slimmer margins. VFM brands are estimated to have grown from 14% of the total legal market in FY18 to ~30% currently.

Forecast. Unchanged.

Downgrade to SELL, TP: 11.75. While earnings was in line with our forecasts, we reckon BAT’s share price has risen to an unjustified level given the earnings uncertainty from (i) chronic high illicit market share, (ii) growth in unregulated vape products and (iii) consumers down trading to VFM brands. Our TP of RM11.75 based on a DCF valuation methodology (WACC: 9.5%, 2.5%) remains unchanged. Downgrade to SELL from Hold.

Source: Hong Leong Investment Bank Research - 1 Jun 2021