BAT’s 9M22 core PAT of RM212.7m (-1.7% YoY) came in above our/consensus expectations, at 85.6%/82.1% of full year forecasts. The outperformance was a result of stronger-than-expected cigarettes sales. However, we are keeping our earnings forecasts unchanged, pending its analyst briefing. Maintain HOLD call on BAT with an unchanged TP of RM11.13 (WACC: 9.5%; TG: 0.0%).

Beat expectation. BAT’s 3Q22 core PAT of RM80.8m (+6.4% QoQ, +0% YoY) brought 9M22’s sum to RM212.7m (-1.7% YoY). This was above our and consensus’ expectations accounting for 85.6% and 82.1%, respectively. The positive surprise was attributable to stronger-than-expected cigarettes sales. Core PAT was arrived after deducting EIs of RM5.5m (mainly due to Prosperity Tax which is estimated to be RM6.2m).

Dividend. Declared DPS of 25 sen (3Q21: 26 sen), which goes ex on 10 November 2022. 9M22 DPS amounted to 67sen vs 9M21’s 71sen.

QoQ. Higher revenue (+4.6%) was predominantly due to higher sales volume, which increased by 4.9% (2Q22: +20.7%). While overall market share was unchanged at 51.5%, Value-for-Money (VFM) brands grew by 0.2ppt to 35.0%, and Premium segment grew by 0.2ppt to 62.3% whilst Aspirational Premium (AP) brands held constant at 41.1%. In tandem with higher sales volume, BAT’s revenue advanced 4.6% to RM666.9m, while core PAT grew by 6.4%.

YoY. Top line registered 8.8% growth thanks to higher sales volume as consumer sentiment improved following the country's transition into the endemic phase. However, no growth was seen in core PATAMI as the higher sales volume was offset by higher operating costs and slimmer GP margin.

YTD. Revenue was up 2.8% on the back of 3.1% volume growth. Overall market share however, declined 0.8% as the result of the delisting of Kent and Rothmans, causing Premium and Aspirational Premium’s market share to ease by 0.7ppt and 1.1ppt, respectively. VFM wise, market share rose 1ppt to 11.2%. In turn, Core PAT contracted -1.7% due to higher operating expenses (+9.6%YoY).

Outlook. Encouragingly, the positive momentum that was seen in 2Q22 continued into 3Q22, with illicit market share easing to 56.1% (vs 57.7% in 2Q22). That being said, consumer down-trading activities is anticipated to persist amid the uptick in living cost, resulting in slimmer margins. Not to mention the higher living cost could also fuel the illicit market and cannibalize BAT’s sales. Meanwhile, BAT’s vape products (Vuse) launch will be deferred after the Control of Tobacco Products and Smoking bill was put on hold due to the dissolution of parliament. Given the extensive range of vape products in the market currently, this may hamper BAT’s vape product p enetrating the market when it is given the greenlight to launch it. This is also compounded by the ruling of RM1.20/ml excise duty on vape gels and liquids that could potentially give rise to an illicit market, as it will more than double some of the nicotine-based vape liquids that are currently sold in the grey market.

Forecast. Unchanged Pending Analyst Briefing.

Maintain HOLD with an unchanged TP of RM11.13 based on an unchanged DCF valuation methodology (WACC: 9.5%; TG: 0.0%). Despite BAT’s outlook being clouded by the sector's high regulatory risk, the current 11x FY23 P/E seems palatable, trading near -1STD of its 5-year average of 15.4x coupled with an attractive DY of >8%.

Source: Hong Leong Investment Bank Research - 28 Oct 2022