Period  4Q13/FY13

Actual vs. Expectations BAT recorded a 4Q13 net profit of RM189.1m which brought its FY14 NP to RM823.4m (+3.2% YoY). This is inline with estimates; at 98% of our full year forecast and 99% of the consensus.

Dividends  A fourth interim dividend of 78 sen was declared as expected, bringing the total to 282 sen (4.7% dividend yield).

Key Result Highlights QoQ, 4Q13 revenue dropped by 6.7% YoY as a result of lower Domestic and Duty-Free volumes (-16.9% QoQ) which were impacted by the excise duty driven price increase in September 2013. While the substantial RM1.50/pkt price increase was able to mitigate the impact of volume decline at the gross profit level (only -4% QoQ), higher operating expenses caused the 4Q13 net profit to drop by 13.8% due to timing factor.

 YoY, Domestic and Duty-free volumes also suffered a 14.9% drop. Nevertheless, overall 4Q13 revenue was flat as BAT benefited from the pricing effect as mentioned above. This also provided a slight improvement (0.4ppt) to gross margins, although the higher operating expenses and effective tax rate resulted in 4Q13 earnings declining slightly by 3.9%.

 YTD, full-year Domestic and Duty-Free volumes (-5.8% YoY) were heavily affected by the declines in 4Q13 (-14.9% YoY), and to a lesser extent 3Q13 (-2.7% YoY). However, the Group continued to benefit from the strong growth in contract manufacturing export volume (+16.1% YoY) which led to FY13 revenue improving by 3.5% YoY and net profit increasing by 3.2% YoY.

Outlook  BAT has achieved a third consecutive year of market share growth, gaining +1ppt in 2013 to 62.0% with growth registered in nearly all variants.

 Although the various initiatives have had a positive impact on BAT's market share, there had been a gradual shrinkage in legal market consumption (-6% YTD industry volumes) due to the increased competition from illicit white cigarettes.

 Note also that the incidences of illicit cigarettes have surged to 38.9% (Oct-Dec) following the price hikes in 2013.

Change to Forecasts We maintain our FY14E and FY15E NPs of RM899.9m and RM922.1m, respectively.

Rating We are maintaining our MARKET PERFORM rating given the limited upside to our TP.

Valuation  Our valuation of BAT remains unchanged at RM63.00, which is based on a targeted PER of 20x on the FY14 EPS of 315.2 sen.

Risks  A higher-than-expected increase in illicit trade, which would accelerate the shrinkage of the legal market TIV.

Source: Kenanga