Period

1Q15

Actual vs. Expectations

1Q15 net profit of RM243.4m (+8% YoY) was within expectations, accounting to 24.6% and 25.5% of our inhouse and consensus forecasts, respectively.

Dividends

DPS of 78.0 sen was declared, in line with our expectation.

Key Results Highlights

YoY, 1Q15 revenue rose 10.4% to RM1.3b despite a 0.4% decline in domestic and duty free volume, thanks to the 12%-14.3% excise duty-led price increase back in November 2014. However, higher operating expenses (+22.5%) translated into a slower growth in operating profit of 7.6%, mainly due to the recognition timing of marketing expenses. As a result, net profit grew 8% to RM243.4m.

QoQ, revenue grew 5.7%, reflecting the full effect of the price increase in November 2014, while was also aided by the pre-GST stocking up activities in March. Operating expenses shrank 28.9% as compared to the previous quarter again due to the recognition timing of marketing expenses. With that, net profit was 24.5% higher as compared to 4Q14, further helped by the normalization of effective tax rate (25% vs 29.5%).

Outlook

The industry volume decline of 0.9% was lower than the 3.5% we are assuming, probably due to the pre-GST buying in anticipation of higher prices as well as the enforcement efforts by the authorities. However, the latest study showed that the illicit market share has recovered to 32.8% in 4Q14 from 32.3% in 3Q14. Thus, we conservatively think that the mild rate of decline in the industry volume might not be sustained moving forward.

We maintain our neutral stance on the stock as the company has continued to deliver earnings on the back of declining volume as well as persistent weak local consumer sentiment. On the flip side, with regards to the Anti-Profiteering Act, we do not expect to see another round of price increase (which is the attractive selling point of BAT) until 3Q16. Thus, net profit growth in FY16 is forecasted to be flattish at 0.4%.

Change to Forecasts

We made housekeeping changes to our earnings forecast after updating the annual report figures. As a result FY15-16E net profits were revised downward by 0.3% and 0.5%, respectively.

Rating

Maintain MARKET PERFORM

Valuation

We roll over our valuation to FY16E and derived a lower Target Price of RM67.40 (previously: RM69.40), based on lower PER of 19.4x (from 20.5x), which implied 5-year mean instead of +0.5SD 5-year mean. We opt to be more conservative on valuation as the results of the enforcement is not as good as initially expected, while the recent reversal of price increase post-GST has also casted doubt on the appeal of BAT being the dominant player in the industry.

Risks

Increase in excise duty or taxes

Worse-than-expected enforcement efforts by the authorities.

Source: Kenanga Research - 29 Apr 2015