• Maintain NEUTRAL, with new TP of MYR12 from MYR11.50, 6% downside. FY22 results were in line with our, but trailed consensus forecasts. We believe British American Tobacco will find it difficult to grow its volume going forward barring any favourable regulatory changes but downside risk should also be limited in view of the stable TIV. The re-tabling of Budget 2023 could offer more clarity to shape the group’s prospects but we see no exciting catalyst at this juncture to further stretch our valuation.

• FY22 results met our, but missed consensus expectations. Core net profit of MYR263m (-11% YoY) accounted for 99% and 96% of our and Street estimates. Post results, we make no material changes to our earnings forecasts and roll out FY25F earnings (+2% YoY). Our DCF- derived TP is slightly tweaked up to MYR12 after refreshing of our risk assumptions. The TP implies 12x FY23F P/E or -1SD from its 5-year mean, which we believe is fair to reflect the group’s challenges and entrenched fundamentals.

• Results review. YoY, FY22 revenue inched down by 2% to MYR2.6bn on the back of a 2% drop in sales volume with FY21 boosted by a one-off benefit in volume due to its route-to-market model transition. Meanwhile, GPM expanded by 0.5 ppt to 26.1% thanks to a more favourable product mix with the premium segment gaining market share. That said, higher operating expenses and Cukai Makmur adjustments dragged down FY22 core earnings by 11%. QoQ, 4Q22 revenue jumped 16% to MYR771m with volume spiking up by 12% driven by the year-end seasonality. However, higher operating costs to accommodate the growth strategy going forward more than offset its topline growth, causing 4Q22 net profit to dip by 18% to MYR62m. FY22 DPS amounted to 88 sen (FY21: 98 sen)

• All eyes on Budget 2023. The re-tabling of Budget 2023 will be a key event to watch out for as we may get more clarity on the reviewed generational endgame policy as well as the Government’s stance on illicit trades and other reduced-risk products. Fundamentally, the industry has seen two consecutive years of volume growth at the expense of illicit trade (56.6% as at FY22) but the pace has slowed down. Therefore, we continue to see a challenging business environment for the group to grow its volume, also taking into consideration the affordability of legal cigarettes on the back of rising cost of living. On the flipside, we see limited earnings downside risks at this point with illicit trades under control and effects of consumer downtrading fizzled out.

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

Source: RHB Research - 9 Feb 2023