BAT’s 1Q22 core PAT of RM56.0m (-28.8% QoQ, -12.5% YoY) missed expectations, forming only 19% of both our and consensus full year forecasts, respectively. The negative surprise was due to lower sales arising from the high illicit cigarette activities, as well as a shift in purchasing habits during the quarter. We lower our FY22/23f earnings forecast by 14%/13% as we incorporate lower sales volume assumption. Our TP is subsequently lowered to RM12.04 (WACC: 9.5%, TG: 1.0%), from RM12.14 previously. Reiterate HOLD on BAT.

Missed expectations. BAT’s 1Q22 core PAT of RM56.0m (-28.8% QoQ, -12.5% YoY) missed expectations, forming 19% of both our and consensus full -year estimates, respectively. The negative surprise was due to lower sales arising from the high illicit cigarette activities, as well as a shift in purchasing habits during the quarter. Core PAT was arrived at after adding back EIs (mainly due to prosperity tax) amounting to RM3.7m to its reported PAT of RM52.3m. We had assume additional tax charges arising from prosperity tax to be c.RM4.4m, which is the amount in excess of a normalised tax rate of 26.4% (based on the most recent 3-year average effective tax rate).

Dividend. Declared DPS of 17 sen (1Q21: 21 sen), which goes ex on 15 June 2022.

QoQ. Revenue declined by 40% as a result of lower sales volume (-39%). The weaker sales volume was attributable to (i) seasonality in its sales; as well as a (ii) high base effect given the one-off benefit owing to the implementation of its route-to-market distributor model in 4Q21. Emergence of the Omicron wave also caused a contraction in cigarette consumption, leading to lower overall sales volume. BAT’s market share contracted by 0.3ppts to 51.9% during the quarter. Similarly, BAT’s Aspirational Premium (AP) brands’ market share also declined by 0.8ppts to 6.8%. In tandem with the weaker top line, core PAT fell by 28.8%.

YoY. Total volume in BAT suffered a 7% decline due to shift in purchasing habits caused by the onset of Omicron wave, resulting in revenue falling by 8%. We note that both Dunhill and BAT’s VFM brands (KYO and Rothmans) saw their market share expand by 0.7ppts and 1.0ppts in their respective segments. This was neutralised by the 1.3ppts reduction in market share for its AP brands. All in, BAT’s market share declined by 0.5ppts to 51.9%. Core PAT declined by 12.5% YoY as a result of weaker revenue.

Outlook. The Tobacco and Smoking Control Bill is currently being finalised and is expected to be tabled in Parliament in July by Health Minister, Khairy Jamaluddin. The intention of the bill is to restrict the sale of cigarettes to individuals born after the year 2005. We note that the Health Ministry is also currently studying the viability of implementing a tobacco product display ban to end the smoking habit. That said, we are of the view that overregulation could potentially fuel illicit cigarette sales as affected consumers will turn to the black market instead.

Forecast. We reduce our earnings forecasts for FY23/24f by 14%/13% as we incorporate a lower revenue assumption to reflect the weaker sales volume. We also included annual report figures and introduce FY24f earnings of RM268.2m

Maintain HOLD, TP: RM12.04. As we revise our earnings projections downwards, our DCF-derived TP is lowered to RM12.04 (WACC: 9.5%, TG: 1.0%), from RM12.14 previously. Reiterate HOLD on BAT.

Source: Hong Leong Investment Bank Research - 30 May 2022