9M21 core PAT of RM213.4m (+17% YoY) was above both our and consensus estimates at 83% and 77%, respectively. The outperformance was a result of the group’s cost optimization efforts, leading to lower-than-expected operating expenses. We are keeping our earnings forecasts unchanged, pending analyst briefing. Maintain HOLD call on BAT with an unchanged DCF -derived TP of RM12.95 (WACC: 9.5%, TG: 2.5%).

Exceeded expectations. 3Q21 core PAT of RM78.7m (QoQ: +10%, YoY: +18%) brought 9M21 core PAT to a total of RM213.4m (+26% YoY), coming in above both our and consensus projections at 83% and 77%, respectively. The outperformance was predominantly due to lower-than-expected operating expenses.

Dividend. Declared a third interim dividend of 26 sen, which goes ex on 12 Nov 2021 (9M22: 71sen). 3Q20 DPS: 21 sen (9M20: 56 sen).

QoQ. Higher revenue (+3%) was predominantly due to higher share of the legal market at 52.7% (2Q21: 52.5%). BAT’s Value-for-Money (VFM) brands like Rothmans and KYO captured a 10% market share, while Dunhill continued to dominate with a 61% share in the premium segment. Total volume was up by 1%. Improved PAT (+10%) was a result of the group’s cost optimization efforts.

YoY. Revenue was down 2%, likely due to the effects of FMCO implementation as well as higher mix of VFM brands. However, Core PAT was 18% stronger YoY, due to the group’s cost optimization efforts (cost of sales: -3.6%, operating expenses: -25.1%).

YTD. Revenue grew by 7%, on the back of higher volume (+3%) due to BAT’s growing market share (+1.5 ppt), despite bearing the brunt of the FMCO implementation and Covid-19 impact. Note that the group recorded a 7% growth in domestic volume, despite the total legal industry only experienced a 6% recovery. With the regional and travel restrictions in place, duty-free sales have continued to be impacted. Given the lower operating expenses (-16%), core PAT grew by 17%.

Outlook. Transhipment controls introduced in Budget 2021 have continued to bear fruit, whereby the supply restrictions have led to a continuous decline in the market share of illicit cigarettes. While we are of the view that consumers trading down to VFM brands from premium brands will continue to exert pressure on the group’s profitability, however, we reckon that the clampdown in illicit activity will be able to compensate for this.

Forecast. Unchanged Pending Analyst Briefing.

Maintain HOLD with an unchanged TP of RM12.95, derived based on an unchanged DCF valuation methodology (WACC: 9.5%, TG: 2.5%).

Source: Hong Leong Investment Bank Research - 29 Oct 2021