AmWatch - British American Tobacco : 2QFY14: Higher quarterly dividend HOLD, 23 Jul 2014

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British American Tobacco : 2QFY14: Higher quarterly dividend     HOLD

We maintain our HOLD recommendation on British American Tobacco (M) with a higher  DCF-derived fair value of RM66.30/share (from RM62.00/share previously) as we roll forward our valuation year to FY15F.

BAT’s 1HFY14 results came in within our and market expectations. Its interim net profit of RM473.5mil (+14% YoY) was commendable in light of the industry’s present challenges, namely the 14% hike in excise duty in Sept 2013 and stubbornly high illicit levels. A second single-tier interim dividend of 78sen/share was also declared. The higher payout (1QFY14: 75 sen/share) is a move away from its tradition of paying a similar quantum in 1Q, 2Q and 3Q before a higher final dividend in 4Q. We are keeping our gross DPS estimates unchanged as its payout ratio is unlikely to go beyond our current assumption of 100%.

We note that BAT’s 1HFY14 YoY net profit growth was nearly triple that of its top line’s (5.7%). This can be mainly attributed to its higher operating margin (+1.8ppts). We are encouraged to learn that a recovery for legal volumes may be on the cards, thanks to greater enforcement by the authorities. After the steep 20% decline in legal volumes in 4QFY13, volumes have been on the rise in the past two quarters. BAT’s YTD May 2014 market share was marginally lower, at 61.7%. This is not surprising given that BAT’s product mix favours the premium segment, which is currently impacted by downtrading activities.

On a slightly negative note, management said that contract manufacturing volumes (2/3 of volumes) is not expected to rebound in the future. Looking ahead, we expect earnings in the next few quarters to be distorted by lower consumption levels during the June/July fasting month, as well as pre-Budget stocking and destocking activities. Our fair value implies a PE of 22x its FY15F earnings.

Others :

Maxis : Hopeful for a gradual recovery, guidance lowered again HOLD

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