INVESTMENT HIGHLIGHTS

• 4QFY17 earnings within expectations
• Illicit cigarettes market remains high at >55%
• Rothmans begins to gain traction
• Declared a 43.0sen fourth interim dividend
• Upgrade to BUY with a revised TP of RM41.10 per share

Within expectations. British American Tobacco’s (BAT) 4QFY17 normalised net profit came in at RM81.0m. This brings its full-year normalised earnings to RM494.2m which is broadly within our expectations, but below consensus full-year earnings estimates at 94% and 87% respectively. Comparing against 4QFY16, revenue and normalised earnings dipped by -16.7% and -48.5%yoy respectively while on a quarterly sequential basis, both revenue and earnings declined marginally lower by -7.5% and -44.3% respectively.

Illicit cigarettes market remains high at >55%. The dip in BAT’s revenue and earnings yoy was mainly attributable to the lower domestic volume and cessation of contract manufacturing during the year. The domestic and duty-free volumes slumped by -14.2%ytd. The lower domestic volume was mainly driven by the legal market volume which contracted by -10%ytd vs FY16. Additionally, a new illicit cigarettes trend has emerged in the market in the form of cigarettes sold with a false customs stamp. Therefore, despite the illegal cigarettes markets showing a decline from 58% in December 2016 to 56.1% in August 2017, concerns remain that decline does not truly reflect the actual situation.

Rothmans begins to gain traction. BAT’s total market share year-todate within the legal market is currently at 54.9% vs 57.1% in FY16. Dunhill now registers a market share of 37.7% as of 4Q17, vs 37.1% in December 2016 and we expect further improvement in Dunhill’s market share as BAT is expecting to invest more in strengthening the Dunhill brand. In addition, we note that its other brand Peter Stuyvesant and Pall Mall have continuous leadership in the Aspiration Premium Brand segment for the 10th consecutive month with a combined market share of 10.9%. This was mainly driven by Peter Stuyvesant’s solid growth trajectory in the 1H17 as well as its resilience in the 2H17. As for the Value For Money (VFM) segment, with the re-introduction of its previous brand Rothmans, BAT’s Rothmans became the fastest growing brand within the VFM segment with a market share of 2.8%.

Source: MIDF Research - 14 Feb 2018