The shares of British American Tobacco Malaysia (BAT) closed 3.0% higher at RM13.56 last Thursday (11 Feb) despite the half-day trading in conjunction with the Chinese New Year holidays as the company released its fourth quarter results last Wednesday (10 Feb). In its latest report (10 Feb), Macquarie Equities Research (MQ Research) reiterates its Outperform rating on BAT with a target price of RM16.30

Event

• BAT reported 4Q20 core net profit of RM78 (+16% quarter-on-quarter (QoQ), -35% year-on-year (YoY)), bringing FY20 net profit to RM261mn (-29% YoY), 5% and 8% ahead of MQ Research’s and the consensus estimates, respectively. Although it had stated that restructuring had been completed in 3Q20, BAT saw an additional RM5mn in restructuring costs for 4Q20. Nonetheless, MQ Research is attributing the higher sequential profit to higher sales volume and lower opex and marketing expenses. BAT’s market share improved 1.1ppt for FY20 to 51.7%, its first increase since 2015. BAT is paying out a 27sen/sh dividend for 4Q20, bringing the total full-year dividend for FY20 to RM0.80/share, well below MQ Research’s estimate due to the added restructuring cost. MQ Research believes valuation, at a 13.6x 2021E PER, is not reflecting upside from the improvement in market share.

Impact

• Underlying operating drivers for 4Q20 were positive, with revenue increasing 5% QoQ for the quarter in tandem with higher sales volume, which saw a 3% QoQ increase that outpaced the industry (flat volume). MQ Research believes this is due to the company’s market-share improvement in the premium segment (Dunhill +0.4ppt QoQ) and the share for Kyo and Rothmans flat for 4Q20. However, illicit market share remained high as of Nov-2020 at 64.4% (ex-vape), +1ppt vs 3Q20.
• On full-year basis, while BAT’s revenue declined 8% YoY due to lower sales volume (-3% YoY), higher illicit market share (including vape – FY20: 70% vs FY19: 68%), and consumer downtrading, its market share improved 1.1ppt YoY, which MQ Research believes is due to stronger performance of Dunhill (+2% ppt) and the value-for-money (VFM) segment (Kyo and Rothmans +5.3% ppt).
• MQ Research’s view: As articulated in MQ Research’s previous report, before turning positive on the company MQ Research believes the market wants to see 1) clearer positive developments on illicit market share from the government’s new efforts announced in Budget 2021 to curb the illicit market and 2) legalisation of the nicotine vaping segment. MQ Research is expecting vape to be legalised in 2021 and illicit market share to hold at 70%.

Action and Recommendation

• MQ Research is maintaining an Outperform rating. BAT will hold 4Q20 results briefings on 18 and 22 Feb to share more colour on the results and current developments.

12-month Target Price Methodology

• ROTH MK: RM16.30 based on a discounted cash flow (DCF) methodology

Source: Macquarie Research - 15 Feb 2021