British American Tobacco - Stronger growth from lower opex Hold

- British American Tobacco (BAT) reported a higher net profit of RM221mil for 1HFY11 (YoY: 14%), coming in a tad ahead of our expectations. Interim earnings for FY12F accounted for 58% of our full-year forecast, and 55% of consensus estimate.

- Management declared a 2nd interim dividend of 65sen/share, bringing total dividends to 130sen/share (single-tier, tax exempt). This accounts for 57% of our DPS forecast of 139sen for FY12F.

- There are no earnings surprises this quarter. The group posted a sequentially higher net profit for 2Q which surged 14% QoQ, attributed mainly to:- 1) A 20% cigarette volume gain amid a marginal 1% decline in quarterly TIV and; 2) A 2.7ppt-margin expansion from implementation of a full contract manufacturing model vs. toll manufacturing previously.

- On a YoY basis, net profit growth outpaced the 3% topline growth. The strong performance was largely due to better containment of operating expenses (YoY: -25%) owing to lower distribution costs arising from the adoption of distribution model back last year, as well as the absence of merchandising depreciation on the back of different accounting treatment in 4Q11. 

- Legitimate TIV for 1HFY12 expanded 4% YoY to circa 6.8 billion sticks, with BAT’s market share up 1.3ppts to 63%. Dunhill remains as the main driver with a record market share of 47.6% for 1HFY12 (YoY: +2.1ppts), thanks to the group’s more aggressive A&P. 

- For instance, feedback for the new and improved Dunhill Switch launched back in April 2012 has been encouraging, and it has garnered 0.6% market share within 3 months of relaunch. The group has also launched a pack upgrade for its VFM Pall Mall label, aimed at stemming the decline of BAT’s market share in the VFM segment.

- We maintain HOLD on BAT with an unchanged DCF-based fair value of RM49.10/share. While industry TIV appears to be on track for positive growth, the persisting high level of illicit trades at 34.7% continues to pose a risk to material TIV growth. Moreover, the industry is fraught with regulatory risks (potential excise duty hike and the proposed reduction of nicotine level in cigarettes).

Source: AmeSecurities