Period  4Q14/FY14

Actual vs. Expectations  Core net profit of RM910m (+10.5%) after excluding one-off cost related to discontinuation of cigarette rations to employees amounted to RM8m met expectations by accounting for 97.4% and 98.3% of our in-house forecast and consensus estimate, respectively.

Dividends  DPS of 78 sen was declared, bringing FY14 DPS to 309 sen (vs FY13: 282 sen), which is within our expectation with a yield of 4.4%.

Key Results Highlights  YTD, FY14 revenue rose 6.2% to RM4.8b despite 3.7% decline in sales volume, mainly due to the full-year effect from a 14.3%-16.7% increase in average selling prices back in September 2013 and partly due to the 12%-14.3% increase in selling prices in November 2014. Core net profit of RM910m was 10.5% higher, driven by margin expansion on the back of higher efficiency and lower interest costs (-24.6%) thanks to the repayment of Medium Term Note in August 2014.

 YoY, 4Q14 revenue grew 10.3% to RM1.2b due to the later timing of price increase (November 2014 against September 2013), which resulted in higher sales volume of 5.1%. Net profit only inched up by 3.4% due to the higher effective tax rate of 29.5% (vs 4Q13: 25.6%).

 QoQ, revenue saw a slight decline, as higher selling price offset the resulting lower sales volume. However, core net profit was down by 18.9% due to the timing of costs recognition and higher effective tax rate.

Outlook  Illegal cigarettes market share has declined by 6.6ppt in over a period of 10 months between Oct 2013 and Aug 2014 to 32.3%, an event which the Group described as unprecedented. As a result, the decline in the legal volume has been narrowed to 4.4% in 2014 from 6% in 2013. Thus, we think that the sustainability of the efforts by the authorities is essential to the growth of the industry.

 Meanwhile, BAT’s market share has declined to 61.2% in FY14 from 61.9% due to the down trading in the market to Aspirational Permium brands, which the Group does not command dominant share. However, we expect the market share to normalize to c.62% as consumers adapt to the higher pricing environment as well as banking on the robust Dunhill brands.

 Outlook might be challenging with the implementation of GST whereby all local companies are restricted from increasing prices to raise profit, which is one of the investment merits of the Group in view of its dominant position in the industry.

 All in, we maintain our neutral stance on BAT as we expect the legal volume trend to continue declining on yearly basis in FY15 (our assumption at 4%) despite the better efforts of the authorities due to the high pricing which induce down trading to illicit cigarettes. On the other hand, we still like the Group for its market leading position with its prized asset of the Dunhill brands.

Change to Forecasts  No changes to forecast. We introduce our FY16E earnings (net profit growth: 0.6%) with assumption of 1% legal volume growth from FY15 and BAT’s market share of 62%.

Rating Maintain Market Perform

Valuation  Target price unchanged at RM69.40, 20x PER FY15E (implies +0.5SD over 5-year mean average)

Risks to Our Call  Lower-than-expected market share.

 Sector risk: The revival of illicits cigarettes trading.

Source: Kenanga