British American Tobacco (BAT)’s 2QFY14  results  were in line with our expectations.  Its  sales  volume  YTD  declined  by  5.5%,  driven  by  the overall reduction in consumption post the excise-led price hike at  the end  of  3Q13.  We  maintain  our  earnings  forecasts  and  keep  our  SELL call on the stock, with our derived FCFF-based FV at RM54.80.

Within  estimations.  Despite  the  decline  in  volume,  BAT’s  2QFY14 revenue increased 6.0% y-o-y and 6.2% q-o-q to MYR1,226.2m, due tothe  cumulative effect of the price increases in June and Sept 2013.  BAT raised its cigarette prices to soften the impact of declining sales volumes. Meanwhile,  its cumulated net profit of MYR473.5m recorded in 1HFY14was  within  our  and  consensus  expectations,  at  56%  of  our  full-year forecasts. The company also announced a second interim dividend of 78 sen per share.

Challenging  environment.  We  continue  to  expect  industry  volume growth to slow down, as both industry players and consumers are facing tough times ahead. The growth of the illegal cigarette trade is expected to  continue  to  impact  the  players,  while  consumers  are  facing  higher costs  of  living  stemming  from  subsidy  rationalisation  programmesintroduced  by  the  Government,  rising  inflationary  pressure,  and increased pressure on disposable income. 

Forecasts and risks.  As the  results are  in line with our estimates, we make no changes to our earnings forecasts. Key risks to our forecasts include: i) more resilient sales volume growth, and ii) lower opex. 

Maintain  SELL  with  an  unchanged  MYR54.80  FV.  We  reiterate  our SELL  call  and  keep  our  FCFF-based  FV  unchanged  at  MYR54.80, (WACC: 6.0%, terminal growth: 1.0%). The stock is currently trading at 23.0x FY15F P/E. We continue to remain negative on BAT due to its rich valuations. Its 4.3% yield also appears unappealing, due to rising interest rates.

Source: RHB