BAT : Maintain HOLD at RM48 with FV of RM44.30

 Nascent signs of live smoke at BAT?

British American Tobacco (Malaysia) Bhd
(Oct 21, RM47.32)

Maintain hold at RM48 with fair value of RM44.30: British American Tobacco (Malaysia) Bhd’s (BAT) 9MFY10 results came in within expectations, accounting for 75% and 79% of market and our (RM689 million) FY10F forecasts respectively.
On a sequential basis, 3Q turnover was flat due to reduced trade speculation.
Compared with the corresponding period in the previous year, earnings before interest and tax margin for 9MFY10 declined 2.5 percentage points (ppts) year-on-year (y-o-y) to 25%, attributable mainly to:
(i) circa RM10 million from higher packaging costs on implementation of Dunhill Reloc’s 20s pack; and
(ii) about RM20 million from margin loss on back of 14s pack withdrawal.
Despite the withdrawal of 14s pack, legitimate total industry volume (TIV) for 3QFY10 increased 15% y-o-y (half a billion sticks). Out of the half a billion additional cigarettes consumed, 30% belonged to BAT labels. BAT’s market share of the premium segment slipped two ppts quarter-on-quarter (q-o-q) to 72%. But, this was more than offset by a +5.6 ppts q-o-q surge to 42% within the VFM (value for money) segment — thanks to the recently relaunched “International Peter Stuyvesant” label.
The group declared a tax-exempt interim dividend of 64 sen per share, three sen higher than the corresponding period in the previous year. Ex-date is Nov 8, with the payment date on Nov 19. We forecast a total dividend of RM2.42 per share in FY10F.
Notwithstanding the group’s successful 98% share retention of Dunhill 14s and positive performance of International Peter Stuyvesant, the quarters going forward are expected to reflect the full impact of: (i) Margin loss from 14s pack ban; and (ii) higher excise duty-related pricing structure. Additionally, the current high illicit at 40% and a potential price increase due to indirect and direct tobacco taxes (for example cess tax) bear risks to TIV growth.
No change to our recently revised FY10F/12F earnings forecasts. Maintain “hold” with discounted cash flow-based fair value of RM44.30, as dividend yield of 5% per year on 90% payout is still decent. — AmResearch, Oct 21