Period

2Q15/1H15

Actual vs. Expectations

1H15 net profit of RM458.6m (-3.1%) was within expectations by accounting for 46.2% and 48.7% of our inhouse forecast and consensus’ estimate, respectively.

Dividends

As expected, the Group declared a second interim dividend of 78 sen/share, lifting YTD DPS to 156 sen, which is in line with our expectation.

Key Results Highlights

YoY, 1H15 revenue declined marginally by 0.8% to RM2.4b, despite the broader 9.6% dip in legal volume mainly due to the weak consumer sentiment worsened by the implementation of GST. The commendable performance was achieved as the product brands across BAT gained market share over the competitors thanks to the introduction of new flavors as well as new packaging. As a result, YTD market share improved by 0.5 pptx to 61.7% as compared to 61.2% in FY14. Net profit recorded a steeper drop of 3.1% to RM458.6m, mainly attributed to the recognition timing of marketing expenses.

QoQ, 2Q15 revenue registered a sharp decline of 14.6% to RM1.1b as industry volume shrank by 17.9%, due to the sales normalization as 1Q15 volume was boosted by pre-GST stocking-up. Post-GST, April industry volume dipped by 30% MoM as consumers reacted negatively to the GST-related price increase, which prompted the Group to reverse a price hike decision and volume subsequently recovered gradually by 6.8% and 6.2% MoM, respectively, in May and June. Net profit decline was narrower at 11.5% due to the recognition timing of expenses.

Outlook

As expected, the mild rate of decline in the industry volume in 1Q15 (-0.9%) was not sustained into 2Q15 as we believed that the illicit volume might have recovered considering the negative sentiment due to the GST-related price inflation. However, we maintain our FY15 industry volume assumption of -4.5% YoY as we think that consumers might adapt faster to the new costing environment in the tobacco industry while also being supported by the continuous enforcement efforts by the authorities to tackle illicit cigarettes.

Overall, we maintain our neutral view on BAT despite the tough operating environment due to the threat of illicits and weak local consumer sentiment. However, we are positive on the market share gain which was essential in proving the Group’s dominance and advantage over its competitors on the back of the strong performance of the key brands. FY15 earnings growth can be achieved despite the volume dip, supported by the price increases in Nov 2014 as well as recently in end-June 2015.

Change to Forecasts

No changes to our earnings forecasts.

Rating

Maintain MARKET PERFORM

Valuation

We maintain our Target Price of RM65.75, based on 18.6x PER FY16E, which implied -0.5 SD over the 5-year mean. The valuation is justifiable by taking the industry volume decline and persistent weak consumer sentiments into account. The stock offers potential upside of 5.4% including dividend yield.

Risks

Increase in excise duty or taxes

Worse-than-expected enforcement efforts by the authorities.

Source: Kenanga Research - 29 Jul 2015