News

BAT through its wholly-owned subsidiary, Tobacco Importers and Manufacturers Sdn Bhd has announced to Bursa Malaysia the winding-down of its factory operations located at Virginia Park, Jalan Universiti, Petaling Jaya. The exercise will be carried out in stages and is targeted to complete by 2H17.

BAT will restructure its business operations in Malaysia by sourcing tobaccos products and semi-finished goods such as processed tobacco for the domestic market from other BAT Group factories.

As a result of the wind-up, the land the factory is sitting on will be disposed by way of a public tender exercise (refer overleaf) while the equipment and machineries will be sold to related parties within the BAT Group. A total of 230 affected employees will be provided with benefits package or the option to undergo a career-transition programme.

Comments

We were taken by surprise on the wind-up of its manufacturing facility as it has never been suggested by the management. However, we think that it is a positive move to protect the company’s interests in amid the challenging business environment (refer to overleaf ).

Limited financial information was given but the Group expects the restructuring exercise to have a positive impact on the BAT group. Thus, we think that by outsourcing production to its regional affiliates, it will be able to provide an avenue for the Group to remain competitive.

While we think that the operational restructuring is positive for BAT to protect its interest, the exercise is also indirectly sending out a negative message reaffirming our bearish and pessimistic view on the outlook of local tobacco sector which has been severely dented by the high excise duty structure and significant illicit trade.

Outlook

Looking forward, volume growth is expected to be soft with the latest round of price increase which encourages down trading to illicit cigarettes. Meanwhile, we do not think that another price increase is likely upon the expiry of Anti- Profiteering Act in June 2016 in view of the fragile sentiment and threat of illicit trades. Thus, we think that gaining higher market share is more relevant for the Group to sustain its earnings growth momentum through innovative new product launches and marketing campaigns.

Forecast

No changes to earnings forecast due to scarce financial information available at this juncture.

Rating

Maintain Market Perform

Valuation

We maintain Target Price of RM57.78, based on an unchanged 17.4x PER FY16E, which implies -1.5SD over 5-year mean average. While the overall outlook is more biased towards negative, we think the dividend yield of 5.9% can provide support to the share price.

Risks

Lower-than-expected market share.

Excise duty hike.

Source: Kenanga Research - 18 Mar 2016