KEY INVESTMENT HIGHLIGHTS

• 9MFY20 earnings disappoint

• 3QFY20 net profit declined by 23.3%yoy to RM63.7m

• Illicit products remain a challenge

• Earnings revised by -12.0% for FY20E and -19.0% for FY21F

• Downgrade to NEUTRAL with a revised TP of RM9.60

9MFY20 earnings disappoint. British American Tobacco (M) Bhd’s (BAT) 9MFY20 net earnings of RM176.5m accounted for 69% of our and consensus full year estimates. We have excluded RM3.1m of restructuring costs as we deem that as one-off. The lower than expected core net profit can be attributed to compressed profit margins due to lower sales volume. An interim dividend of 21.0sen was announced, bringing YTD DPS to 56.0sen.

3QFY20 net profit declined by -23.3%yoy to RM63.7m even though revenue was up by +7.4%yoy to RM617.5m. Net profit did not catch up with growth in sales mainly due to lower operating margin. The higher sales can be attributed to higher market share, which improved by 1ppt to 52.5%. The higher volume sold is supported by the introduction of “KYO”. Both “KYO” and Rothmans achieved 35.8% of the value segment, which is an improvement of 5.6ppt compared to a year ago. Meanwhile, The market share for Dunhill in the premium segment remains strong at 64.0%, unchanged quarter-on-quarter.

Sequentially, normalised net profit improved by 22.5% while revenue increased by 14.8%. The topline improvement can be attributed to higher volume sold due to the strengthening of its value segment. As a result, net profit increased in tandem with the better sales. On another note, the market share of illicit cigarette had further increase to 64.5% compared to 60.5% in the previous quarter. Meanwhile, volume from the duty free segment continues to remain suppressed due to the constraints in international traveling. Volume from duty free sales account for about 4% of BAT’s overall sales previously.

Illicit products remain a challenge. The company’s growth continues to be hindered by the growing tobacco black market, which has adversely affected the legal tobacco market. Although the group has launched the “Stop the Black Market” campaign earlier in 3Q to raise awareness, it requires more holistic measures by other stakeholders to improve the situation.

Source: MIDF Research - 30 Oct 2020