British  American  Tobacco’s  (ROTH)  1HFY13  results  were  in  line  with expectations.  The  growth  of  its  contract  manufacturing  business continues  to  be  robust  while  domestic  cigarette  sales  also  improved, resulting  in  better  quarterly  earnings.  Although  the  stock  still  offers  a decent dividend yield of 4.5%, we think it is close to being fairly valued. Maintain NEUTRAL.  

- In  line with  expectations.  ROTH’s 1HFY13 net earnings of MYR415m (-0.1% y-o-y) were in line with expectations, making up 52% and 50% of our  and  consensus  full-year  forecasts  respectively.  During  the  quarter, revenue  improved  6%  q-o-q  (+8%  y-o-y),  thanks  to  the  continuous growth in its contract manufacturing business  coupled with the recovery in  its  domestic  cigarette  sales.  However,  2QFY13  net  profit  inched  up only  3%  q-o-q  (-5%  y-o-y)  on  the  back  of  higher  merchandising  and share scheme costs. A second interim DPS of 68 sen was declared.

- Dunhill on stronger footing, VFM stabilizes. Dunhill (DH), its premium brand,  continues  to  cement  its  leadership  position  in  the  market  with  a +0.3%  share  q-o-q  (+1.6%  y-o-y)  to  47.3%.  This  was  primarily  due  to growth  at  its  existing  product  base  along  with  the  strong  take  up  of  its new  variants  –  as  at  2Q,  Dunhill  Switch  had  0.8%  share  in  the  market compared  to  last  year  of  0.4%  while  Dunhill  Ice  had  0.52%,  up  0.2% from  its  launch  in  March.  Conversely,  in  the  value  for  money  (VFM) space,  the  market  share  of  Pall  Mall  had  stabilized  at  the  5.2%-5.4% level  on  an  m-o-m  basis,  while  Peter  Stuyvesant’s presence in  the market was resilient at the 3% mark. 

- Maintain NEUTRAL, MYR61.07 FV. Given that there were no surprises this  quarter,  we  keep  our  forecasts  unchanged.  Though  the  prevalence of  illicit  white  cigarettes  circulating  in  the  market  had  dipped  marginally by  0.5ppt  to  23%  from  Oct-Dec  to  March-May  period,  it  is  still  a  key concern  given  the  heightening  risk  of  an  excise  duty  hike  in  the upcoming  Budget  2014.  In  addition,  cigarette  manufacturers  had  raised selling  prices  by  MYR0.30/pack  in  June.  That  said,  our  FV  on  ROTH remains at MYR61.07, based on DCF valuation (WACC: 5.5%, TG: 1%). Maintain NEUTRAL on ROTH given its decent yields of 4.5%.

Source: RHB