KEY INVESTMENT HIGHLIGHTS

• 1HFY20 earnings below expectations

• 2QFY20 normalised net profit slipped 19.8%yoy to RM61.2m as sales declined by 14.7%yoy to RM546.6m

• Continue to strengthen value for money segment

• Earnings revised by -12.9% for FY20E and -4.0% for FY21F

• Maintain BUY with a revised TP of RM14.90

1HFY20 earnings below expectations. British American Tobacco (M) Bhd’s (BAT) 1HFY20 normalised earnings recorded RM116.2m, which accounted for 40.8% of ours’ and 44.3% of consensus full year estimates. The lower than expected core net profit can be attributed to compressed profit margins due to lower sales volume particularly from the duty-free segment. Income tax rate was also higher than we expected. An interim dividend of 18.0sen was announced, bringing YTD DPS to 35.0 sen.

2QFY20 normalised net profit slipped -19.8%yoy to RM61.2m as sales declined by -14.7%yoy to RM546.6m. Normalised net profit for the quarter was lower mainly due to lower sales volume that came down by -16%yoy. We have excluded a one-off restructuring cost amounting to RM6.6m from our normalised PAT. Industry-wide problem, namely illicit products continue to flood the market, thus impacting market share. The illicit cigarettes volume share remains high at close to 70%. That said, the legal market seemed to have stabilised with unchanged industry domestic shipment volume recorded compared to a year ago. The duty-free segment, which comprises 4% of BAT’s topline, continued to be adversely impacted by regional and international travel restrictions due to Covid-19. Normalised net profit for 1HFY20 fell - 28.4%yoy to RM116.2m while sales declined by -14.7%yoy to RM1.0b.

2QFY20 rebounded from a much weaker 1QFY20. Sequentially, revenue rose -13.6%qoq and normalised earnings climbed -11.2%qoq in tandem with the improvement in sales. We think that this may be attributed to management’s agility in sales and distribution along the easing of the Movement Control Order (MCO). This has also resulted in share growth in convenience stores from 44.7% in 1QFY20 to 46.6% for the latest quarter. During the quarter, consumer shifted from general trade to convenience stores. Notably, market share for convenience stores for Dunhill increased by 1.1ppt while Rothmans was up by 0.7ppt qoq. We are hopeful that this may be an early sign of an improving trend going forward

Source: MIDF Research - 24 Jul 2020