INVESTMENT HIGHLIGHTS

• 1QFY18 earnings below expectations

• Illicit cigarettes market at all time high of 63%

• Rothmans remains the fastest growing brand

• Declared a 33.0sen first interim dividend

• Maintain BUY with a revised TP of RM37.70 per share

Below expectations. British American Tobacco’s (BAT) 1QFY18 normalised net profit came in at RM96.2m which is below our and consensus’ full-year earnings estimates at 18.6% and 18.2% respectively. Comparing against 1QFY17, revenue and normalised earnings dipped by - 14.8% and -20%yoy respectively while on a quarterly sequential basis, revenue declined by -8.9% whilst earnings increased by +16.8% respectively.

Illicit cigarettes market at all time high of 63%. The dip in BAT’s revenue and earnings yoy was mainly attributable to the lower domestic and duty-free volumes which slumped by -6.0%yoy. The lower domestic volume was mainly driven by the legal market volume which contracted by -4.0%ytd vs 1QFY17. Additionally, the illicit cigarettes volume share continues to increase to a record high of 63% in 1QFY18 which consists of smuggled cigarettes at 59% and quasi legal cigarettes with fake tax stamps at 4%. This in return has impacted the group’s volume translating to a decline by -8%qoq in terms of the group’s overall volume sold.

Rothmans remains the fastest growing brand. BAT’s total market share year-to-date within the legal market grew by 0.8ppt to 54.7% in 1QFY18 from 53.9% in 4QFY17. In addition, Dunhill now registers a market share of 38.2% with a share growth of 0.5ppt vs 37.7% in 4QFY17; attributable to its ongoing initiative to reinforce the brand’s legacy. Furthermore, its Value For Money (VFM) segment, with the reintroduction of its previous brand Rothmans; remains the fastest growing brand within the VFM segment with a +1.2ppt growth in market share against last quarter’s 2.8%. The launch of Rothmans has also enabled the group to achieve a 30% market share in the VFM segment which is line with our expectations. However, the Aspirational Premium segment experienced a slight decline in market share due to the growth of the VFM segment. That said, the group managed to extend its leadership in the segment from 42% in FY17 to 44% in 1QFY18.

Source: MIDF Research - 22 May 2018