1HFY22 turnover that matched performance from a year ago indicates that the sector has returned to normalcy following the reopening of the economy. We reduce our TP by 16% to RM11.20 (from RM13.40), reflecting a higher WACC of 8.1% and a lower TG of -2%, coupled with a 5% discount to reflect a 2-star ESG rating as appraised by us. BAT’s growth prospects are limited, given rising health consciousness, stricter government regulations, rampant illicit trade and the trend towards ESG investing. The stock may appeal to certain yield seekers with its high dividend yield of 8%. Downgrade to MARKET PERFORM from OUTPERFORM.

In-line with expectations. 1HFY22 results came in in-line within expectations at 49% each of both our and consensus full-year forecasts. The company declared an interim dividend of 25.0 sen, bringing YTD dividend declared to 42.0 sen, on track to meet our full-year forecast of 85.0 sen.

YoY, revenue remained flat at RM1.16b. Its premium and value-for-money segments saw improvement in market shares, by 0.9ppt and 0.7ppt to 62% and 35%, respectively. The only blip was a 3.3ppt decrease in their mid range segment to 41% of market share. EBITDA margin remained stable due to operational efficiency despite inflationary pressures. Overall, PATAMI fell 6.8% due to rising operating expenses and the increased taxation due to Cukai Makmur.

QoQ, revenue rose 22.2% to RM637.5m as the transition into the endemic phase boosted overall domestic of consumption of cigarettes by 7%. However, the Group’s market share in all segments remained flat at 62% (premium), 41% (mid-range) and 35% (value-for-money). Illicit trade incidence in 2QFY22 remained flat at 58%. Overall, the Group recorded a PATAMI of RM73.2m, a 40% increase QoQ and in-line with the increased revenue and improved margins.

Outlook. We expect earnings in 2HFY22 to sustain its current uptrend driven by the reopening of the economy, improved duty-free sales as regional and international traveling recovers, and potential market share gain in the premium segment. The company continue to see illicit trade as one of its main threats. The proposed generational ban on cigarettes and vape products for those born after 2005 presents another long-term challenge for the group as it limits long-term growth.

Earnings forecasts. Maintained.

Downgrade to MARKET PERFORM from OUTPERFORM. We reduce our TP by 16% to RM11.20 (from RM13.40), reflecting a higher WACC of 8.1% to reflect a higher in-house risk-free rate, and a lower TG of -2% to reflect BAT’s limited growth prospects given rising health consciousness, stricter government regulations and rampant illicit trade, coupled with a 5% discount to reflect a 2-star ESG rating as appraised by us (see table on page 4). We also see limited catalyst for BAT’s share price given the trend towards ESG investing. However, the stock may appeal to certain yield seekers with a high dividend yield of 8%.

Source: Kenanga Research - 22 Jul 2022