Period

3Q15/9M15

Actual vs. Expectations

9M15 net profit of RM715.5m (+0.1%) is within expectations, accounting for 72.1% of our in-house forecast and 76.4% of the consensus’ estimates.

Dividends

As expected, the Group declared a third interim dividend of 78.0sen/share, lifting YTD DPS to 234 sen, which is in line with our expectation.

Key Results Highlights

YoY, 9M15 revenue fell marginally by 1.9% on the back of a dip in industry volume by 10.9% (BAT: -10.0%) but offset by the price increases in November 2014 and June 2015. Nevertheless, EBIT was able to record flattish growth of 0.1% to RM966.4m thanks to higher production efficiency. Similarly, net profit grew 0.1% to RM715.5m.

QoQ, 3Q15 revenue climbed 6.8% to RM1.2b mainly attributable to the recovery in industry volume of 6.9% as 2Q15 volume was hit by negative sentiment due to GST. Together with the swing in recognition timing of marketing expenditure, EBIT surged 20.7% to RM349.3m. Net profit grew slower by 19.3% to RM256.9m due to higher effective tax rate of 25.9% (vs 2Q15:25.0%).

Outlook

Industry volume has declined faster than we initially expected (9M15: -10.9%) due to the weak consumer sentiment which was aggravated by the GST implementation which reduced spending directly. We believe illicit trades have grown taking advantage of the situation, but the continuous enforcement efforts by the authorities should be able to mitigate the impact.

On the bright side, BAT still managed to deliver earnings that were within expectations, thanks to its impressive market share gain (YTD up 0.8 ppt to 62.0%). The dominance was driven by the consistency of key brand, Dunhill, and the rising performance of Peter Stuyvesant, which expanded its market share by 1.2ppt.

Moving forward, we foresee further challenges in sustaining the earnings growth in view of the sluggish market growth and the threats of illicit cigarettes. However, we remained confident on BAT’s ability in producing steady performance despite the headwinds due to its strong branding position.

Change to Forecasts

Despite the results coming within our expectation, we trimmed our FY15E and FY16E net profit forecasts by 2.3% and 0.5%, respectively, after imputing steeper industry volume decline of 7% in FY15 (from 4.5%) while keeping FY16E earnings assumptions unchanged. We also lifted our market share assumption to 62.2%-62.4% (from 61%) after the strong performance.

Rating

Maintain MARKET PERFORM

Valuation

Correspondingly with the earnings revision, our Target Price is adjusted downward to RM65.45 from RM65.75, based on unchanged 18.6x PER FY16E, which implied 0.5SD below the 5-year mean.

Risks

Increase in excise duty or taxes.

Worse-than-expected enforcement efforts by the authorities.

Source: Kenanga Research - 28 Oct 2015