BAT’s 2019 results tracked ahead of our and consensus expectations, accounting for 109%/108% of full-year forecasts respectively. The variance to our forecast was largely due to a better-than-expected seasonal volume sales trend over 4Q19. Nevertheless, market conditions remain subdued with total legal industry volume declining further by 10% yoy. We remain cautious as the illicit cigarette trade looks likely to stay, with enforcement actions still insufficient to counter its growth. Maintain HOLD with a lower TP of RM11.50.

Ending Above Expectations

BAT’s 2019 revenue declined by -11% yoy to RM2.5bn, as total legal industry volume continued to shrink (-10% yoy) amidst the stubbornly high level of illegal cigarette incidence (c.68% inclusive of illegal vaping). Meanwhile, its EBITDA margin was down 2ppt over the year partly on the downtrading towards value-for-money (VFM) cigarettes. After stripping off restructuring costs that amounted to RM15.4m, core net profit stood at RM361.1m (-19.6% yoy). Overall, the results were ahead of both our and consensus expectations, accounting for 109%/108% of respective full-year forecasts. The variance to our forecast mainly arose from the higher-thanexpected seasonal volume sales trend during the final quarter.

Better Sequentially on Seasonal Trends

On a qoq basis, both revenue and core earnings saw an uptick of 13% and 36%, registering RM662.4m and RM113.1m respectively. This comes as volume sales increased on the back of seasonal volume trends while brand awareness activities worked well to BAT’s favour during the period. The final quarter also saw improvement in margins (+3.9ppt) partly driven by better cost efficiencies. A fourth dividend of 33sen was declared, bringing full-year DPS to 118sen (2018: 155sen) – above our expectations.

Maintain HOLD

Despite results tracking ahead of our expectations, we expect market conditions for BAT to remain subdued moving forward given the persistently high level of illicit cigarette incidence. We trim our 2020-21E EPS forecasts by 7-12% and lower our terminal growth rate to 1% (from 2%), as enforcement activities have failed to yield desirable results. Post revision, we maintain our HOLD rating on BAT with a lower DDM-derived TP of RM11.50. Yields of c.8% may not present enough appeal to accumulate the stock given the risk of further earnings contractions, in our view.

Source: Affin Hwang Research - 21 Feb 2020