Period

4Q15/FY15

FY15 net profit of RM910.1m (+0.9%) is within expectations, accounting for 97.5% of our in-house forecast and 100.4% of the consensus’ estimate.

Dividends

As expected, the Group declared a fourth interim dividend of 78.0 sen/share, lifting FY15 DPS to 312 sen, which is in line with our expectation. 

YoY, FY15 revenue declined by 4.5% to RM 4.6b on the back of 13.5% dip in sales volume as a result of weak consumer sentiment and massive excise duty hike in November 2015. Operating profit inched up marginally by 0.7% to RM1.2b thanks to higher operating efficiency and lower marketing expenses. As a result, net profit rose 0.9% to RM910.1m. 

QoQ, 3Q15 revenue slid 8.9% to RM1.1b as the price increase in November 2015 (23.2%-26.0%) led by the 42.9% hike in excise duty caused volume to slump by 19.4%. Together with the recognition of administrative and marketing costs in the year-end, operating margin eroded by 4.2ppt to 25.9%, dragging operating profit down by 21.5% to RM274.1m. Net profit suffered a steeper decline of 24.3% to RM194.5m as a result of the higher effective tax rate of 28.6% (3Q15:25.9%).

Outlook

As expected, industry volume reacted negatively to the massive excise duty hike in end-2015 while the illicit trade is believed to have grown strength to strength following the significant price increase introduced in conjunction with the excise duty hike. 

The saving grace for the Group was the gain in market share from 61.2% to 62.1% in FY15, which aided in protecting the earnings growth thanks to the gallant performance of Peter Stuyvesant.

Looking forward, volume growth is expected to be soft following the latest round of price increase which encourages down trading to illicit cigarettes. Meanwhile, another round of price increase is unlikely upon the expiry of Anti-Profiteering Act in June 2016 in view of the fragile sentiment and threat of illicit trades. Thus, we think that market share gain is more relevant for the Group to sustain its earnings growth momentum through innovative new product launches and successful marketing campaigns.

We introduce FY17E earnings forecast with net profit growth of 0.2% while FY16E forecast is unchanged.

Rating

Maintain MARKET PERFORM

Valuation

We maintain Target Price of RM57.78, based on unchanged 17.4x PER FY16E, which implies -1.5SD over 5-year mean average. While the overall outlook is more biased to negative, we think the dividend yield of 5.8% can provide support to the share price.

Risks

Increase in excise duty or taxes. 

Worse-than-expected enforcement efforts by the authorities.