BAT’s 1QFY21 results are in line with our/consensus expectations. Good progress can be seen from measures introduced in Budget 2021 to control contrabands, with both its volume and brands enjoying improvements. TP is raised to RM14.80 as we roll over valuation base to FY22. With good progress and an attractive dividend yield (c.6%), we upgrade the counter to MARKET PERFORM.

Within expectation. 1QFY21 CNP of RM63m came in at 25%/23% of our/consensus estimates. The 21.0 sen DPS declared is also in line, accounting for 24% of our expectation of 86.0 sen.

Improvement in margins. YoY, top-line saw an 18% improvement with domestic volume seeing 19% growth attributed to decline in illegal cigarette’s market share following measures introduced in Budget 2021. The Group’s domestic volume has grown in line with industry recovery rate with its March 2021 volume growth trajectory outperforming the legal industry by 3ppt. Duty-free sales continued to be impacted due to regional and international travel restrictions from the COVID-19 headwinds. Total market share recorded at 52.3%, (+2ppt). All segments saw growth - Dunhill (+4%) in the Premium segment, Peter Stuyvesant and Pall Mall (+1%) in the Aspirational Premium segment and Rothmans and KYO (+4%) in the VFM (Value-For-Money) segment. EBIT saw 22% improvement to RM87m offset by a higher Opex (+8% - due to strategic investments in the growing brands) and a Covid-19 impact of RM7m. With an unchanged ETR, CNP ended 24% higher to RM63m.

QoQ, Underpinned by lower domestic volume – result of seasonality sales in the preceding quarter (1Q are historically weak quarter), top- line declined 14%. Share of the market remained flat with its Premium Brand recording a moderate 1% uptick with VFM brands remaining stable with a 10% market share. Opex declined 22% (with the absence of one-off restructuring costs and machinery write-off). Despite EBIT constricting higher (-17%), CNP fell slower (13%) as ETR fell 4ppt to 24%.

Structural issues still remain. In spite of the Budget 2021 being a positive one for BAT with more stringent measures imposed to curb rampant contraband cigarettes, we believe the key matter lies in execution and any meaningful earnings recovery for the stock would only materialise with a sustained clampdown on the illegal cigarettes. Moving forward, we reiterate our view that the group’s outlook should continue to be clouded by the rampant illicit tobacco issue, with signs indicating such syndicates changing their modus operandi to circumvent the measures introduced in Budget 2021. However at the same time, growth will be sustainable ahead given its introduction of less risky products to consumers, progressive regulation on Vape products and strengthening of its VFM products

Post results, no change to our FY21E earnings as results are in line.

MARKET PERFORM. We raised our TP to RM14.80 (RM11.45 previously) as we roll over our valuation base to FY22E applying a PER of 16.0x (in line with a -0.5SD over its 3-year mean). Despite good progress made since Budget 2021, we remain cautious given the structural concerns. Dividend yields are still attractive c.6%; thus BAT is upgraded to MARKET PERFORM.

Source: Kenanga Research - 1 Jun 2021