RAM Ratings has reaffirmed the AAA rating of British American Tobacco (Malaysia) Berhad’s (“BAT Malaysia” or “the Group”) RM700 million Medium-Term Notes Programme (2007/2020), with a stable outlook.

Published on 13 September 2013

RAM Ratings has reaffirmed the AAA rating of British American Tobacco (Malaysia) Berhad’s (“BAT Malaysia” or “the Group”) RM700 million Medium-Term Notes Programme (2007/2020), with a stable outlook.
BAT Malaysia’s credit profile is supported by its entrenched market position and superior financial profile. The Group remained the clear market leader in the local tobacco-manufacturing industry, gaining 1.5 percentage points in its share of the industry last year to 60.7% (2011: 59.2%). Its flagship brand Dunhill remained the most popular local premium cigarette brand in 2012, with a 63.1% share (2011: 62.2%) of this segment. The Group also garnered a 41.5% share in the value-for-money (“VFM”) segment in fiscal 2012 (2011: 43.5%). Nevertheless, the rating is moderated by the challenging industry landscape characterized by declining sales volumes, threat of illicit cigarettes and increasingly strict regulatory oversight.
BAT Malaysia posted a 5.8% increase in revenue to RM4.36 billion in FY Dec 2012 on the back of higher cigarette prices subsequent to the 20 sen hike in October 2012 as well as higher domestic/duty-free sales volumes y-o-y (+0.2%). Aided by lower corporate incentives and the absence of non-recurring items such as merchandising asset write downs, BAT Malaysia’s operating profit before depreciation, interest and tax (“OPBDIT”) grew 8.8% to RM1.12 billion in FY Dec 2012 (FY Dec 2011: RM1.03 billion). The Group managed to record its highest pre-tax profit in 4 years of RM1.05 billion in FY Dec 2012 (FY Dec 2011: RM956.27 million). Nonetheless, 1H FY Dec 2013 saw BAT Malaysia’s financials softened y-o-y. Despite improved revenue thanks to higher cigarette prices following the price hikes in October 2012 and June 2013, the Group’s OPBDIT in 1H FY Dec 2013 only increased marginally y-o-y due to higher cost of sales (+10.6%) as a result of the switch from toll to contract manufacturing.
BAT Malaysia has been boasting strong financial protection metrics, with its adjusted funds from operations (“FFO”) debt coverage ratio recording an average 1.41 times over the past 5 years. The Group’s adjusted FFO and operating cashflow debt coverage ratios remained strong in 1H FY Dec 2013, standing above 1 time each. BAT Malaysia’s gearing ratio improved to 1.00 time in the same period (FY Dec 2012:1.03) due to a lighter debt load. “Looking ahead, we expect BAT Malaysia’s cashflow-protection measures to stay superior, supported by its well-established market position and strong brand equity,” opines Kevin Lim, RAM Ratings’ Head of Consumer & Industrial Ratings. 
Offsetting the above strengths are the increasingly difficult operating environment and regulatory risks of the local tobacco industry. While the industry sales volumes for legitimate cigarettes registered a surprise increase after 8 consecutive years of decline, we expect a contraction in sales volumes this year as evinced in 1H FY Dec 2013, whereby industry sales volumes fell due to the price hikes in October 2012 and June 2013. Going forward, we opine that the industry sales volumes will continue to be pressured by increasingly strict regulatory oversight. While the incidence of illicit trade had reduced from 36.1% in 2011 to 34.5% in 2012, illegal cigarettes still accounts for a significant portion of local tobacco consumption. In addition, extremely-low-priced cigarettes (“ELPC”) are expected to remain a threat to the 3 major domestic tobacco manufacturers especially if the price differential between ELPCs and premium as well as VFM cigarettes widens due to increased excise duties, without a corresponding adjustment to the floor price.

Media contact
Fam Pei Xin
(603) 7628 1187
peixin@ram.com.my