KEY INVESTMENT HIGHLIGHTS

• 3QFY19 earnings came in at RM83.1m, in line with our expectation

• Sales volume decline due to the persistent high level of illegal cigarettes consumption

• The group has intensified its rationalization efforts to cushion the decline in revenue

• Attractive dividend yield of +6.4%

• Upgrade to BUY with a revised TP of RM25.90

Earnings met our expectation. British American Tobacco (M) Bhd’s (BAT) 3QFY19 normalised earnings came in at RM83.1m. This brings its 9MFY19 earnings to RM248.0m which met ours but lagged consensus’ full-year FY19 earnings estimates at 71.9% and 66.0% respectively. Comparing on a quarterly sequential basis, 3QFY19 earnings staged an encouraging +9.0%qoq growth driven by aggressive cost cutting measures, e.g. lower marketing expenses. Nonetheless, earnings declined by a staggering -43.0%yoy which was caused by a significant declined in sales volume.

Persistent high level of illegal cigarettes consumption. The dip in BAT’s 3QFY19 can mainly be attributed to the lower legal industry volume which contracted by -11.0%yoy. Consequently, BAT’s sales volume dropped by -13.0%yoy to 260.0m sticks. The illicit cigarettes volume share remains high at about 65.0%. The management indicated that the illegal cigarettes volume share is anticipated to grow by about +4.0% in the near term. Additionally, the rapid increase on unregulated vaping products will continue to impact the tobacco industry. Currently, unregulated vapour accounts for about 9.0% of total market share.

Continue on its rationalisation efforts. Given the pressure on sales volume from the rampant illegal cigarettes trade and rise in consumption of vaping products, the group will continue on its rationalisation efforts to lower the impact of declining revenue. The group will be laying off 20.0% of its total headcount, i.e. 100 roles between Q4FY19 to Q1FY20. We expect the cost savings will be channelled towards developing new product such as “Glo” which is BAT’s tobacco heated product to ensure future sustainability.

Declared 29sen dividend for 3QFY19. BAT declared an interim dividend of 29sen per share for 3QFY19 (vs 3QFY18 of 40sen). Cumulatively, dividend declared for 9MFY19 is of 85sen per share (vs 3QFY18 of 108sen). This brings its dividend payout ratio to 98.0% of earnings.

Source: MIDF Research - 1 Nov 2019