4Q21 core PATAMI of RM78.6m (-2.7% QoQ, +1.3% YoY) brought FY21 core PAT to RM294.1m (+12.8% YoY). The performance was in line with both our and consensus estimates at 104% and 103%, respectively. We keep our earnings forecasts unchanged, but we lower our TP to RM12.14 (WACC: 9.5%; TG: 1.0%), as we revise our long term growth rate downwards. This is to reflect the potential shrinking of customer base in light of MoH’s recent plan to ban smoking for the younger generation. Maintain HOLD on BAT.

Within expectations. 4Q21 core PAT of RM78.6m (-2.7% QoQ, +1.3% YoY) brought FY21 core PAT to a total sum of RM294.1m (+12.8% YoY). The results were within our and consensus estimates, accounting for 104% and 103%, respectively. Core PAT was arrived at after adjusting for restructuring expenses that totalled to RM9.3m.

Dividend. Declared an interim dividend of 27 sen, which goes ex on 22 February (FY21: 98 sen). 4Q20 DPS: 27 sen (FY20: 83 sen).

QoQ. Higher revenue (+40.6%) was driven by a recovery in the legal tobacco market, as well as the further easing of movement restrictions. BAT’s market share stood at 52.2% (-0.5ppts), with Dunhill remained as the market leader within the premium segment, commanding a market share of 61%. Market share for its Value-for-Money (VFM) brands like Rothmans and KYO, was flat, maintained at 10%. Core PAT, however, reported a 2.7% decline, due to higher effective tax rate.

YoY. Revenue grew by 30.5% YoY, which in our view, was likely due to a continued recovery in the legal tobacco market. However, a sharp increase in operating expenses (+58% YoY) has resulted in core PAT growing by a mere 1.3%.

YTD. Revenue saw a 14% growth on the back of stronger sales volume as the tobacco black market experienced a 6.1% reduction. BAT’s total market share grew to 52.4% (+0.8ppts YoY) mainly supported by the Group’s strategic brands (i.e. Dunhill, Rothmans and KYO). Consistent with the growing top line, BAT’s core PAT recorded a 13% YoY increase.

Potential smoking ban. MoH is planning to impose a ban on the sale of smoking products to individuals born after year 2005, in a bid to ban smoking permanently for the younger generation. Health Minister, Khairy Jamaluddin has also revealed that the Tobacco and Smoking Control Act will be tabled to the parliament for this purpose and to regulate the consumption of vape and e-cigarettes. Although the ban is not expected to take effect immediately, we are of the view that the gradual shrinking of customer base would be detrimental to BAT. With that, we lower our long-term growth rate on BAT from 2.5% to 1.0%.

Forecast. We make no changes to our earnings forecast, as we do not foresee the potential smoking ban to have any significant impact on our FY22-23 forecasts.

Maintain HOLD, TP: RM12.14. As we revise down our long-term growth rate on BAT, our DCF-derived TP is lowered to RM12.14 (WACC: 9.5%; TG: 1.0%) from RM14.16. Maintain HOLD on BAT.

Source: Hong Leong Investment Bank Research - 9 Feb 2022