INVESTMENT HIGHLIGHTS

• Sustained 1QFY19 normalised earnings of RM88.6m, despite illicit cigarettes market remained high at 61%

• Legal market volume contraction by -8.0%yoy and launch of competitor’s tobacco heated product in 1QFY19 impacted earnings

• Declared a 30.0sen first interim dividend

• Maintain BUY with a revised TP of RM35.50 per share

1QFY19 earnings below expectations. British American Tobacco (M) Bhd’s (BAT) 1QFY19 normalised net profit came in at RM88.6m. This is below ours and consensus’ full-year FY19 earnings estimates at 16.9% and 15.1% respectively. Comparing against 1QFY18, revenue contracted marginally by -2.6%yoy to RM770.6m whilst the respective normalised earnings declined by -7.9% on a year-over-year basis. On a quarterly sequential basis, revenue staged a decline of -19.4%yoy whilst earnings grew by +8.9%qoq.

Illicit cigarettes market remained high at 61%. The dip in BAT’s 1QFY19 can mainly be attributed to the lower legal industry volume which contracted by -6.0%yoy. The lower domestic volume was mainly impacted by the legal market volume which contracted by -8.0%yoy in comparison to 1QFY18. Additionally, the illicit cigarettes volume share remains at a record high of 61% since 1QFY18. Furthermore, the challenging operating environment is further exacerbated by the launch of its competitor’s tobacco heated product during the quarter and the switch from premium and aspiration brands to value for money (VFM) brands such as Rothmans which commands lower margin.

Declared 30sen dividend for 1QFY19. BAT declared a first interim dividend of 30sen per share for 1QFY19. This is as opposed to 33sen declared during the same period last year. The dividend declared is below our dividend forecast of 165.4sen for the year but represents a payout ratio of 97%. As such, we are revising our dividend forecast to 143.6sen.

Earnings estimates maintained. We are revising our FY19-20F earnings forecasts downward to RM455.5m and RM502.3m respectively as we factored in more conservative assumptions in our earnings forecasts.

Source: MIDF Research - 29 May 2019