British  American  Tobacco  (BAT)’s  FY13  results  were  in  line  with  our and street expectations. Its 4Q13 sales volume plummeted by 19%  y-o-y post-excise duty hike, and we  expect 2014 to be  a  challenging year  for domestic  cigarette  players.  We  cut  our  FY14  earnings  by  9%  and  we introduce our  FY15 projections.  Maintain  SELL  on  the stock, with our FCFF-based FV lowered to MYR54.76 (from MYR57.06).

• Within expectations.  BAT’s FY13 net profit of MYR823.4m  (+3%  y-o-y) was within our and consensus expectations,  at  98-99% of our  full-year forecasts.  4Q13  revenue stayed flat y-o-y  (-7% q-o-q),  thanks to higher average selling prices (ASPs). Recall that BAT raised its cigarette prices by  MYR1.50/pack in October after the Government imposed an excise duty  hike  of  MYR0.60/pack.  Yet,  its  4Q13  net  profit  dropped  4%  y-o-y and  14%  q-o-q  due  to  a  higher  effective  tax  rate,  as  there  were  no reinvestment  allowances  in  the  quarter.  The  company  declared  a   final DPS  of  78  sen,  bringing  its  full-year  DPS  to  MYR2.82  (vs  FY12’s MYR2.72).
• Outlook. We expect 2014 to be a challenging year for domestic cigarette players.  We note  that  following  the  Government’s  imposition  of  a  14% excise duty hike  in late September last year, BAT’s  4Q13  sales volume slumped  by  19% y-o-y and  20% q-o-q, while  its  FY13  sales volume slid 8% y-o-y.  Also,  illicit cigarette trade had  proliferated  to 39% in Oct-Dec from 34% in June-Aug.
• Forecasts and risks.  After incorporating BAT’s full-year results  into our model,  we  revise  downwards  its  FY14  revenue/net  profit  estimates  by 3%/9% respectively. We expect FY14 sales volume to fall by 9% y-o-y and  introduce  our  FY15  projections.  The  key  risks  to  our  forecasts include: i) stronger sales volume, and ii) lower-than-expected opex.
• Divestment case.  Following the  downward revision  in  our forecasts, we reduce our FV to MYR54.76 (from MYR57.06), based on FCFF valuation (WACC:  6%,  TG:  1%).  This  represents  an  implied  FY14/15  P/Es  of 18.4x/18.7x.  All  in,  we  remain  negative  on  the  stock  given  its  rich valuations and waning yield appeal. Maintain SELL.

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Company Profile
British American Tobacco (BAT) manufactures cigarettes and markets its products under its key brands Dunhill, Pall Mall and Kent.

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Source: RHB