AmWatch - British American Tobacco : 1QFY15: Volumes supported by pre-GST loading activities HOLD, 29 Apr 2015

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British American Tobacco : 1QFY15: Volumes supported by pre-GST loading activities      HOLD

We reaffirm HOLD on British American Tobacco (M) (BAT) with an unchanged DCF-derived fair value of RM69.50/share, which implies an FY15F PE of 22x. BAT reported a 1QFY15 net profit of RM243mil (QoQ: +30%; YoY: +8%) on the back of turnover of RM1,274mil (QoQ: +6%; YoY: +10%). Annualised, the results were within our and consensus expectations. As expected, the group also declared a first tax-exempt interim dividend of 78 sen/share (1QFY14: 75sen/share).

The higher revenues reported (both QoQ and YoY) can be mainly attributed to the excise duty-induced RM1.50/pack (+12.5% to +14.3%) price hike, which was effective Nov 2014.  Given the negative correlation between price and legal TIV, we had anticipated sequential volumes to decline in 1QFY15. This was, however, not the case as cigarette volumes were well supported by pre-GST loading activities. QoQ, industry TIV was up by 4.4% while BAT’s was higher by a smaller 1.5%.

BAT’s underperformance vis-à-vis the industry is not surprising in view of the quarter’s downtrading activities. BAT’s flagship premium brand, Dunhill, had recorded a 0.6ppt drop in its market share while its leading aspirational premium brand, Peter Stuyvesant, grew by 0.9ppt. Overall, BAT’s market share was marginally lower (-0.1ppt) at 61.1%. Looking ahead, we expect BAT to continue registering softer volumes and market share following its unfavourable pricing decisions in Apr 2015. We also do not expect its 3ppts margin expansion in 1QFY15 to be sustainable given that it is fully-exposed to the impacts of the GST.

We make no changes to our FY15F-FY17F earnings estimates. Despite the group’s muted earnings growth and lack of positive catalysts in the industry, we believe the stock will continue to be of interest to income investors as well as those who seek defensive attributes in their equity holdings.

Others :

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