BAT's FY12 earnings of RM797.7m (+10.9% y-o-y) were within expectations as subcontract manufacturing's contribution and lower distribution costs lifted profits. Good news abound, as Dunhill remained Malaysia's favourite and dominant cigarette brand, with a 1.6ppt market share increase to 47%. Meanwhile, illicit trade eased slightly to 34.5%. That said, we believe that 2013 will be a year plagued by heightened regulatory risks for the tobacco industry post-general election. Upgrade BAT to NEUTRAL following its share price retracement.
Within expectations. BAT registered 4QFY12 revenue of RM1,094.0m (+10.8% y-o-y, -5.7% q-o-q) and earnings of RM196.7m (+8.9% y-o-y, +5.9% q-o-q) as minimal trade speculation in 3QFY12 prior to the 2013 Budget announcement saw some sales volume spilling over into 4QFY12. In prior years, cigarettes typically experienced a strong uptake in 3Q in anticipation of potential tobacco excise hikes in annual Budgets. Weak sales volume subsequently follows in 4Q as retailers gradually deplete their high stockpiles. The company's full-year turnover and profits for FY12 clocked in at RM4,364.8m (+5.8% y-o-y) and RM797.7m (+10.9% y-o-y) respectively as marginally stronger volumes, contributions from subcontract manufacturing and lower distribution expenses boosted growth. The year's earnings account for 100.3% of our and consensus estimates.
Dunhill leads the pack. BAT's FY12 sales volume, measured by invoiced sales to retailers, rose by a marginal 0.2% y-o-y, trailing the industry's 5.7% expansion. The company's market share, calculated based on AC Nielsen's end-user consumption estimates, nonetheless grew another 1.6ppt y-o-y to 62.6%. Dunhill led market share growth with a 2.6ppt increase to 47.3%, further cementing it as Malaysia's most popular brand. However, the brand with the strongest growth over the past 12 months was Philip Morris International (PMI)'s Marlboro Ice Blast, which propelled the company's volume by double digits. This prompted Dunhill to recently release its own menthol switch cigarette, currently only sold at 7-Eleven outlets.
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Illicit trade softens. Stronger enforcement by authorities saw illicit cigarette trade moderate by 1.6ppt y-o-y to 34.5% of total cigarettes smoked in Malaysia. Although illicit trade continues to be elevated, it has been steadily declining over the past three years as the Government froze tobacco excise duty hikes.
Dividends. While FY12 earnings were just a whisker above our estimates, dividends were slightly ahead of our expectations at RM2.72 per share, or at 2.8% of our forecast.
Upgrade to NEUTRAL. We are keeping our FY13 and FY14 earnings forecasts unchanged. Our FV is hence maintained at RM56.22, based on our FCFF valuation (WACC: 5.5%, terminal growth: 1.0%). Following the share price's 10.3% decline since our SELL call, we are upgrading BAT back to NEUTRAL. However, industry growth prospects are weak, with regulatory risks likely to further intensify after the general election.