BAT’s FY22 results met expectations. Its revenue fell slightly on market share loss following the shelving of some products. We are slightly more upbeat on sales volume in FY23, taking our cue from a resilient FY22. However, we are mindful of the risk of smokers downtrading amidst high inflation. We raise our FY23F net profit by 5% and lift our TP by 5% to RM12.00 (from RM11.45) but maintain our MARKET PERFORM call.

Within expectations. FY22 net profit met our forecast and consensus estimate. The declared dividend of 21.0 sen brings the total dividend up to 88.0 sen for the full-year, slightly below our expectation of 90.0 sen.

YoY, revenue fell 1.5% following a 2% drop in annual sales volume. This was largely attributable to a 0.8ppt loss in market share following the delisting of the Kent and Pall Mall product lines. Otherwise, gross profit (+0.5%), EBITDA (-0.2%) and EBIT (-1%) remained relatively flat YoY in FY22. In terms of market share, Dunhill continued to lead in the premium segment, commanding 62.6% of overall market share. However, the group observed a 1% decline in premium market volume due to increase in downtrading during FY22. We believe this was due to inflationary pressure eating into disposable income as well as faltering consumer optimism during 2HFY22. On the other hand, the value-for-money (VFM) segment grew, albeit slightly, increasing 1% YoY with the group’s products capturing 35.3% of overall market share.

Overall, net profit fell by 7.8%, largely due to the effect of Cukai Makmur as tax expenses increased 12.5% YoY.

QoQ, 4QFY22 revenue rose 15.6% as sales volume increased 12.4%. The group largely attributes this to the seasonal sales driving up volume. Group market share (+0.1%) remained flat QoQ with the premium (+0.3%), mid range (+0.7%) and VFM (+0.3%) segments recording minor growth. However, earnings were hit by an 87.6% increase in operating expenses as net profit fell 18%. The group attributes the increase largely to end-year restructuring expenses and in-line with the increase observed during FY21 (113.9% increase in opex).

Outlook. While we expect sales volume to sustain going into FY23, we remain cautious given the continued trend of downtrading within the market. If inflation continues to bite into consumer spending, the group could see a further increase in downtrading from their higher margin segments or even to black market cigarettes which could jeopardise earnings. Given the group controls the lion’s share of the premium segment, their leading Dunhill brand could be at risk of losing volume if consumer sentiment worsens.

Conversely, looking to government regulation paints a slightly brighter picture for FY23. While Budget 2023 is pending re-tabling later in February, the group was largely positive on the measures proposed in the previous version. Subsidies and cash hand-outs would support consumer spending and the regulations by the Multi Action Task Force were largely in-line with those proposed during the group’s meetings with government officials. Recall, during 3QFY22, Malaysia saw a 1.6ppt decrease in illicit volume following an uptick of inland seizures. The group is also not immediately concerned with the generational ban on cigarettes given it has also yet to be re-tabled.

Source: Kenanga Research - 9 Feb 2023