• Maintain NEUTRAL with new MYR13.50 TP from MYR15.80, 9% upside. 2021 results beat expectations marginally on higher-than-expected volume in 4Q21. Earnings growth going forward is unexciting as we believe the legal TIV recovery will be capped from hereon and legalisation of vaping products may not be earnings accretive in the immediate term. The proposal to ban the sale of cigarettes and tobacco products to those below 18 years of age is a sentiment dampener, but we believe the downside is supported by the >8% dividend yield.

• FY21 results were slightly above expectations. Core net profit of MYR294m (+13% YoY) accounted for 103% of both our and Street’s forecasts on higher-than-expected volume. Post-results, we cut FY22F earnings by 7% to account for the Cukai Makmur impact and introduce FY24F earnings that imply a flat YoY growth. Our DCF-derived TP drops to MYR13.50 after we tweak our terminal growth assumption to -3% from -2% to account for the bleak longer-term prospects following the Government’s proposal to prohibit the sale of cigarettes and tobacco products to people born after 2005. We believe the ban, pending legislation, will have muted earnings impact in the near- to medium-term, as those affected are not likely to be existing consumers of legal cigarettes. Our new TP implies 14x P/E FY22F, which is on par with -0.5SD over the stock’s 5-year mean. We made no adjustments based on our ESG score of 3.0.

• Results review. YoY, FY21 sales grew 13% to MYR2.6bn on the back of 5% growth in volume (legal TIV: 5%). Illicit market share eroded by 6.1ppts to 58% as a result of effective enforcement efforts. FY21 GPM was stable at 25.6%, as the impact of downtrading fizzled out. British American Tobacco has made investments to prepare for the new category business and strengthen its technology expertise, resulting in higher FY21 opex (+9% YoY). QoQ, 4Q21 sales jumped 41% to MYR862m on the recovery in legal TIV and easing of COVID-19 restrictions. However, higher investments on the abovementioned reasons capped QoQ net profit growth to a mere 1%.

• Strong 4Q21 sales may not be sustainable. We are not overly excited by the strong 4Q21 sales, as it may have been aided by the frontloading in anticipation of economy reopening and year-end holidays, disrupted illicit trade operations, and a change in BAT’s distribution strategy. Looking forward, the structural affordability issue and threat from illicit trade will remain relevant and should cap any further legal TIV recovery from hereon, in our view. Meanwhile, the regulation of vaping, barring any major delay, is unlikely to lift earnings immediately considering the marketing investment and similar price gap disadvantage vs the illegal products.

• Upside/downside risks to our outlook include higher/lower-than-expected TIV and favourable/unfavourable regulatory or policy changes.

Source: RHB Securities Research - 09 Feb 2022