4Q20: Within Expectations

• BAT’s 2020 core net profit of RM260.3m (-27.7% yoy) was broadly within our full-year expectations but tracked ahead of consensus (107%)
• 4Q20 revenue registered the 3rd consecutive qoq growth to RM660m (-0.3% yoy), but core net profit dipped to RM77.4m (-31.6% yoy), likely owing to a higher VFM sales mix, compressing its margins
• We make no changes to our forecasts. Maintain BUY with an unchanged TP of RM16.20. Yields remain at an attractive 7% at current level

Within Expectations

BAT posted a 2020 revenue of RM2.3bn (-7.7% yoy), attributable to a volume decline of -8% on a combination of illicit cigarette impact, down-trading and lower duty-free sales. Illicit incidence remains rife at 70% for 2020 (vs 2019 c.69%). EBITDA margin contracted -3.8 ppt to 16.3%, likely in part owing to a higher value-for-money (VFM) sales mix but partially offset by cost rationalisation exercise. Excluding one-offs, BAT registered a core net profit of RM260.3m (-27.7% yoy). The result was broadly within our expectations (104%), but tracked ahead of the consensus forecast (107%).

3rd Consecutive Quarter of Qoq Growth

Sequentially, BAT posted a revenue and core net profit of RM660.2m (+5.2%) and RM77.4m (+15.8%) respectively. Revenue trended higher qoq as volume sales (+3% qoq) continued to outpace that of the legal domestic industry growth for the 3rd

consecutive quarter, driven by robust demand for VFM offerings (Kyo and Rothmans) on top of its premium Dunhill brand. In tandem, the group’s market share rose to 52.4% (vs 4Q19 50.4%). Specifically, BAT’s share of the premium segment is at 59% (+2ppt vs 2019) and VFM segment at 33% (+5ppt vs 2019). Notwithstanding the lower-margin nature of VFM offerings, we expect growing volume sales to offset lower profitability and boost sequential earnings growth. Elsewhere, a fourth interim DPS of 27sen was declared, bringing 2020 to 83 sen, within expectations. (2019: 118 sen).

Earnings Likely to Have Bottomed Out; Maintain BUY

We make no changes to our earnings estimates. Looking ahead, we believe VFM will continue to drive overall volume growth for BAT, capturing a fair share of consumer downtrading. Further upside risks may also transpire from a reduction in illicit volumes on prospects of better containment of the illegal market as well as a gradual return to normalcy further supporting demand. Maintain BUY with an unchanged DDM-based target price of RM16.20. At current levels, yields remain generous and likely sustainable at c.7%.

Source: Affin Hwang Research - 11 Feb 2021