BAT’s FY22 core PAT of RM282.1m (-4.4% YoY) came in within ours but above consensus expectation, at 99% and 107% of full year forecasts, respectively. The YoY decline in core PAT was mainly driven by lower sales volume, as a result of the delisting of Kent and Rothmans. Market share erosion was also seen in FY22 due to the same factor but should recover gradually going forward on the back of the group’s effort to grow its Dunhill brand, which has 62.6% market share in the premium segment. We raise our TP to RM12.35 (from RM12.08) as we roll over our valuation base year to FY23 but downgrade BAT to HOLD due to limited upside after the run-up in share price recently.

In line but beat street. BAT’s 4Q22 core PAT of RM69.4m (-14.2% QoQ, -11.8% YoY) brought FY22’s sum to RM282.1m (-4.4% YoY). The result was within ours but above consensus expectation, accounting for 99% and 107% of full year forecasts, respectively. FY22 core PAT was arrived at after adjusting EIs of RM19.6m (mainly due to Prosperity Tax which is estimated to be RM21.0m).

Dividend. Declared DPS of 21 sen (4Q21: 26 sen), which goes ex on 22 Feb. FY22 DPS amounted to 88 sen vs FY21’s 98 sen, implying a payout ratio of 89%.

QoQ. Driven by higher sales volume (+12.4%) due to year-end seasonality sales, BAT’s revenue recorded a 15.6% growth. Market shares in Value-for-Money (+0.3% to 35.3%) and Premium (+0.3% to 62.6%) segments continued to register steady growths, while Aspirational Premium (AP) brand market share rose by 0.7% to 41.8%. With this, the group’s overall market share registered an increase of 0.1ppt to 51.6%. However, core PAT was down by 14.2% by virtue of higher restructuring cost (+520%) in preparation for multi-category product expansion.

YoY. Top-line declined by 10.6% due to lower sales volume (-13.0%) as 4Q21 recorded a one-off benefit in volume following the transition to RTM model (report). Core PATAMI declined by 11.8% despite a higher GP margin (+1.2ppt).

YTD. Revenue declined by 1.5% due to lower sales volume, which was mainly dragged by the delisting of Kent and Rothmans and the one-off event as mentioned above. The delisting of its brands also caused BAT’s total market share to ease from 52.4% to 51.6%. In turn, core PAT contracted -4.4% due to a higher tax rate.

Outlook. Recall that the government had prior to parliament dissolution introduced measures like (i) special rewards scheme; (ii) enhanced controls at entry points for cigarettes including private jetties; and (iii) a single exit point in the northern region for cigarettes, to address the revenue leakage. Should there be no major policy changes in the new “Budget 2023-2.0”, we reckon the measures that combat cigarette smuggling activities will help to reduce the illicit market share, which benefits BAT in terms of higher sales volume. Meanwhile, the implementation of GEG is expected to be deferred as the Tobacco Bill will need to start over from the first reading in the Dewan Rakyat. Not to mention if there is a need for further amendment to the bill requested from the newly formed parliament, this would delay it further.

Forecast. Unchanged.

Downgrade to HOLD but with higher TP of RM12.35. We raise our TP to RM12.35 (from RM12.08) as we roll forward our valuation base year to FY23, based on an unchanged DCF valuation methodology (WACC: 9.5%; TG: 0.0%). However, we downgrade BAT’s rating to HOLD (from Buy) due to limited upside following the recent run-up in its share price (+23% since our last upgrade on 18th Nov 2022).

Source: Hong Leong Investment Bank Research - 9 Feb 2023