BAT’s FY21 results came in line as 4QFY21 saw strong top-line performance (best since FY16) given the reopening of the economy and the authorities’ success in curbing contrabands. We, however, expect further challenges ahead given the proposal to ban all kinds of cigarettes products to those born after 2005 plus renewed illicit activities on the aftermath of the proposed banning. TP is reduced to RM13.10 but maintain call at OUTPERFORM on account of its enticing dividend yields.

In line. FY21 PATAMI of RM285m came in within both our and consensus estimates at 103% and 100%, respectively. 4QFY21 revenue saw its best performance since 4QFY16 with the reopening of the economy. The 27.0 dividend per share declared for the quarter brought full-year dividend to 98.0 sen (vs. our full-year expectation of 91.0 sen).

Domestic volume grows. YoY, overall sales saw a jump of 14% to RM2.64b with BAT’s domestic volume growing 5% as a result of reduction in the tobacco black market by 6%. Total volume jumped 10% to 3.73b. Duty free sales continued to be impacted by regional and international travel restrictions. BAT’s domestic volume growth outpaced the total legal industry by 80bps with market share improving slightly by 70bps to 52.4%. Its Premium and Value for Money (VFM) segment saw continued growth momentum at 190bps and 150bps, respectively, while its Aspirational segment saw a growth of 70bps. Overall margins saw stability despite opex increased marginally due to the improving top-line. ETR saw a 1.1ppt increase but PATAMI surged 18% given the strong top-line.

QoQ, as the economy reopens, the quarter saw its best performance since 2016, surging 40% to RM862m with volume surging 42% from the previous quarter. However, BAT’s share of the market saw a 50bps dip to 52.2% from the previous quarter. GP margin was relatively stable at 26% but EBIT margins saw an 5ppt erosion to 13% due to additional investments in preparation of new category business i.e. vaping products. Higher opex and higher ETR (32%) saw PATAMI falling 9% to RM72m.

Challenges continue. As we reiterated previously, 2HFY21 looks like a positive one for BAT, given the gradual reopening of the economy with industry volumes gaining traction on stringent measures introduced in Budget 2021 to curb rampant contraband cigarettes. Moving forward, we re-emphasis our view that growth will be sustainable given its introduction of less risky products to consumers, products’ household name and strengthening of its VFM (Value-for-Money) segment. We also view that challenges will be aplenty given that contraband remains a significant threat as syndicates continue to find new avenues to smuggle illicit goods. Enforcement activities will likely be lower given the easing of travel restrictions. The government’s recent announcement of its plan to prohibit all tobacco and cigarettes products to those born after 2005 will curb sales and in our view will likely boost the demand for illicit products.

Post results, we revised down our FY22E earnings by 7% on account of the Cukai Makmur and introduced our FY23E earnings.

OUTPERFORM maintained. As we slashed earnings estimate, TP is reduced to RM13.10 (from RM16.70) applying a FY22E PER of 14.2x (implying a 0.5SD below its 5-year mean) to take account the aforementioned challenges. However, we maintain the stock at OUTPERFORM on account of its consistent enticing dividend yields of >7%.

Source: Kenanga Research - 9 Feb 2022