BAT’s 1HFY21 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 sales volume and brands enjoying improvements. We raised our TP to RM15.70 based on revised FY22E PER of 17x. Undervalued at this juncture with an attractive dividend yield (c.6%), we upgrade the stock to OUTPERFORM.

In line. 1HFY21 CNP of RM135m came in at 54%/49% of our/consensus estimates. The 24.0 DPS declared for the quarter is also in line, bringing DPS declared to date to 45.0 sen (vs. our full-year expectation of 86.0 sen.

Improvement in all areas despite the FMCO. YoY, top-line saw a +13% improvement with BAT’s domestic volume seeing +14% growth coming from: (i) a low base due to the MCO last year, and (ii) progress in addressing the contraband tobacco market following measures introduced in Budget 2021. The Group’s domestic volume has grown in line with industry recovery rate with its June 2021 volume growth trajectory outperforming the legal industry by 2ppt despite the disruption from the FMCO in June 21. Total market share inched up to 52.4%, (+1.5ppt from the same period last year). All segments saw growth - Dunhill (+2.7%) in the Premium segment, Peter Stuyvesant and Pall Mall (+1%) in the Aspirational Premium segment, and Rothmans and KYO (+4.4%) in the VFM (Value-For-Money) segment. EBIT margins saw a 160ppt improvement to 17% as opex fell 9% due to the absence of restructuring costs that were incurred in 1HFY20. With an unchanged ETR, CNP ended 28% higher to RM135m.

QoQ, top-line saw a rebound (as seasonally 1Q is a weak quarter) at +5% to RM596m. BAT’s domestic volume saw a similar growth at +5% to 845mns (vs. the industry compression of 2%) against the backdrop of the FMCO in June as volume growth for the month fell 55%51% to 172m/362m for BAT/industry, respectively. Share of the market remained flat at 52% with both its Premium Brand and VFM recording a stable market share at 61% and 10% market share, respectively. EBIT saw a 23% growth as opex declined 24% with EBIT margin improving by 2.6ppt to 17.9%. Despite sharp rise in EBIT, CNP saw a slower pace in growth (+13%) as ETR saw a 6ppt uptick to 30%.

Supply issues addressed. Moving into the second half of the year, Budget 2021 looks like a positive one for BAT as industry volumes continue to gain traction on stringent measures imposed to curb rampant contraband cigarettes. Moving forward, we reiterate our view that growth will be sustainable ahead given its introduction of less risky products to consumers, products’ household name and strengthening of its VFM products. Supply concerns are minimal given the Group holding five additional weeks of inventories (or +66% coming from its overseas stocks). However, on-going risks remains namely; (i) 58% of the tobacco market is dominated by criminal syndicates and have shifted their operations to coastal smuggling, (ii) over 1m domestic smokers continue to consume unregulated, untaxed nicotine vapour products, compounding further downside risks.

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

OUTPERFORM. We raised our TP to RM15.70 (RM14.80 previously) with a revised PER of 17.0x (from 16.0x) or -0.25SD over its 3-year mean) as we see momentum building up from Budget 2021’s effective measures. Upgrade to OUTPERFORM given its undervalued proposition at this juncture plus an enticing dividend yield of c.6%.

Source: Kenanga Research - 26 Jul 2021