BAT’s 1Q15 results of MYR243.4m (+8% YoY) were within expectations.Maintain NEUTRAL, and MYR62.50 TP (5% downside). 1Q15 sales volume was stronger than expected from pre-GST front-loading by consumers. There is still an earnings downside, amidst the industry’s outlook being plagued by fairly high levels of contraband cigarettes and frequent excise duty hikes. An interim DPS of 78 sen was declared.

• Within expectations. British American Tobacco’s (BAT) 1Q15 earnings of MYR243.4m were within our and consensus expectations, making up 26% of full-year estimates. 1Q15 earnings were up 8% YoY, driven by a 10.4% YoY growth in revenue from: i) domestic and duty-free volumes being better than expected, and ii) a MYR1.50 per pack price hike in Nov 2014. However, 1Q15’s EBIT margin slipped to 25.7% (1Q14: 26.4%) due to: i) high material costs, ii) a 3-sen per stick hike in excise duty to 28 sen per stick from Nov 2014 onwards, iii) increase in operating costs from restructuring and timing of marketing expenditure. BAT’s market share dipped slightly to 61.1% as at Mar 2015 (2014: 61.2%). An interim DPS of 78 sen was declared during the quarter.
• Outlook. BAT has revised prices of all its cigarette brands back to pre-1 Apr levels effective 17 Apr. Its competitor, Philip Morris SB has followed suit too. The further price revision reflects the mature tobacco industry whereby earnings growth could come from either: i) a hike in ASP that more than offsets the declining sales volume, or/and ii) a gain in market share from competitors. We continue to see downside risks to earnings amidst the industry’s challenging outlook, as it is plagued by fairly high levels of contraband cigarettes and frequent excise duty hikes.
• Forecasts and risks. In view of the in-line earnings, we make no changes to our earnings forecasts. Key risks to our forecasts include: i) lower sales volume, ii) higher-than-expected material costs, and iii) higher-than-expected excise duty hike.
• Still NEUTRAL with a MYR62.50 TP. We remain NEUTRAL, while our DCF-based TP stays at MYR62.50 (WACC: 6.8%, TG: 1.5%). Although dividend yields remain decent at 5% for FY15F-FY17F, valuations are not sufficiently compelling to warrant a more positive opinion, as the stock already trades at 19.8x FY15F P/E (its historical 5-year mean) relative to its modest earnings growth prospects and the mature industry.