• Maintain NEUTRAL and TP of MYR11.50, 10% upside. 1H22 results met expectations with higher opex and tax charges offsetting topline growth. The current valuation may have priced in most of the negative sentiment arising from the proposal to ban the sale of tobacco products to those below 18 years old, although we believe near-term earnings impact remains muted. However, the stablilised legal TIV volume and British American Tobacco’s dominant market share should sustain the attractive dividend yield of c.9% and cap further downside.

• 9M22 results within expectations. Core net profit of MYR201m (-7% YoY) met 76-78% of our and consensus estimates. Post results, we make no changes to our earnings forecasts and DCF-derived TP of MYR11.50 (no adjustment on its ESG score of 3.0). The TP implies 11x FY23F P/E, or close to the -1SD from its 5-year mean, which we believe is fair to reflect both BAT’s challenges and entrenched fundamentals.

• Results review. YoY, 9M22 sales inched up by 3% to MYR1.8bn on 3% volume growth thanks to the normalisation in consumption. Meanwhile, 9M22 GPM was steady at 25.8%, up 0.2ppt YoY, which we believe was due to the stable product mix as the effects of consumer downtrading fizzled out. That said, higher opex (+10% YoY) and effective tax rate (ETR) (+4.8ppts) on Cukai Makmur adjustments dragged down core net profit by 7% despite topline growth. QoQ, 3Q22 sales rose 9% to MYR667m, benefitting from the market’s return to normalcy following the reopening of the economy. However, bottomline growth was slower at 3% QoQ due to the higher ETR (+3.1ppts). 9M22 DPS totalled at 67 sen (9M21: 71 sen)

• Outlook. The legal TIV volume should sustain at the current level, premised on the broad containment of the pandemic and stabilised illicit trade market share. That said, further upside from hereon should be capped, taking into account the structural affordability factor. Meanwhile, the regulation of vaping is likely to be further delayed following the dissolution of Parliament. Even if passed, we think it is unable to lift earnings immediately considering the potential gestation period and the similar price gap disadvantage vs the illegal products. On the other hand, the proposal to ban the sale of tobacco products to those below 18 years old is a sentiment dampener as longer- term volume outlook will be dented, subject to the effectiveness of execution. However, we believe the near-term earnings impact remains muted as underage smokers are not likely the consumers of legal cigarettes.

• Risks to our recommendation include higher/lower-than-expected TIV, and favourable/unfavourable regulatory or policy changes.

Source: RHB Research - 28 Oct 2022