Above expectations. BATM posted 2QFY12 revenue of RM1,068.0m (+2.4% both y-o-y and q-o-q) and earnings of RM220.8m (+19.9% y-o-y, +13.5% q-o-q). the company eked out marginal revenue gains despite stagnant shipment volume as it sold more Premium segment cigarettes. Net margins, meanwhile, widened by 3.0 ppt y-o-y to 20.7%, largely due to a 39.8% drop in operating expenses. 1HFY12 earnings totaled RM415.4m (+14.5% y-o-y) on the back of slightly stronger sales volume and substantially lower operating expenses. The first six months' profits represented 56.5% and 55.6% of our and consensus estimates respectively.

Lower operating expenses lift earnings. The vast improvement in 1HFY12 earnings came from a RM58.5m reduction in operating expenses, of which RM13.0m arose from cost recognition timing differences while the bulk of the remaining RM45.5m reduction was attributed to lower provisions for staff incentives (e.g. bonuses) and savings arising from BATM's move to outsource its distribution network in 4QFY11. Cost savings from a change in the company's distribution model is likely to have led to a RM15m-RM16m cost reduction, indicating that RM20m-RM30m of the remaining cost reduction probably came from lower allocation for staff compensation. BATM will launch its 1SAP system in September and will be first among the companies within the BAT group to do so. The BAT group's 1SAP system is the single largest global SAP system being implemented and is targeted to enhance standardisation and transparency within the BAT group to further squeeze out potential cost savings.

Shipments weaker. The revenue drivers were, and remained unexciting. BATM sold 2.17bn sticks during 2QFY12 (-1.2% y-o-y), boosting the 1HFY12 shipments to 4.34bn sticks (+1.6% y-o-y). The company's 1QFY12 volume picked up 4.5% y-o-y after a weak 1QFY11, during which sub value-for-money (VFM) brands were sold below the minimum retail price (MRP) of RM7 per 20-stick pack. Hence, 1QFY12's volumes were still some 3.6% off the more normalized 1QFY10. In 2QFY12, total industry volume (cigarettes from BATM, JTI and PMI) rose by a much tamer 0.4% y-o-y following a 7.7% y-o-y jump in 1QFY12.