Period  1Q14

Actual vs. Expectations BAT reported 1Q14 net profit of RM225.4m (+19.2% QoQ, +10.4% YoY) which was in-line with our estimates at 25% of full-year forecast of RM899.9m, and at 26% of the consensus of RM863.7m, respectively.

Dividends  A first interim dividend of 75 sen was declared as expected.

Key Result Highlights YoY, BAT's 1Q14 revenue rose by 5.3% as a result of the compounded effect of pricing hike in June (30 sen/pack) and the excise-led price increase in September 2013 (RM1.50/pack). Unsurprisingly, volumes for both the Domestic and Duty-Free segment (-6.4% YoY) and the Contract Manufacturing segment (-23.1%) were affected although the latter segment was particular hard-hit due to partial movement of volumes from Japan to another manufacturer. Nevertheless, the increased revenue coupled with the higher margins and better mix of domestic volumes led to a 9.3% improvement in 1Q14 EBIT and a 10.4% rise in NP.

 BAT registered Jan-Feb market share of 62.0% which represents a +0.3ppt growth on a YoY basis. Dunhill (+0.5ppt YoY) continued to be the principal growth engine due to the lauch of Dunhill Ice in 1Q13, while the introduction of Resealable Reloc feature for Peter Stuyvesant (+0.6ppt YoY) also boosted market share. In contrast, Pall Mall continued to underperform despite significant overall improvements (-0.5ppt YoY).

 QoQ, BAT's 1Q14 revenue also improved modestly by 5.6% due to volume recovery in Domestic and Duty-Free volumes (+7% QoQ) which was able to offset the significantly lower Contract Manufacturing volumes (-17% QoQ). A stronger mix of higher margin domestic to contract manufacturing volume and timing of marketing expenditure also resulted in higher gross profits and lower operating expenses to culminate in a 17.4% QoQ improvement in EBIT (+2.6ppt margin expansion). Consequently, 1Q14 NP rose by 19.2% QoQ.

Outlook  Illicit cigarettes have surged to 38.9% (Oct-Dec) following the price hikes in 2013. Nevertheless, we see efforts being made by the Royal Malaysian customs in addressing the illegal cigarette trade through recent enforcement activities such as Ops Outlet. In addition, the Malaysian courts have also been meting out more severe sentences to those caught selling illegal cigarettes.

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

Rating We are maintaining our MARKET PERFORM rating given 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 to our Call    A higher-than-expected increase in illicit trade, which would accelerate the shrinkage of the legal market TIV.

Source: Kenanga