BAT (FV RM52.90 - NEUTRAL) 1QFY12 Results Review: Higher on Low 1Q Base

BATM posted 1QFY12 earnings of RM194.5m  (+8.9% y-o-y), in line with both our and consensus forecasts. While the absence of an excise duty hike in Budget 2012 contributed to the increase in cigarette sales, part of the 4.5% rise was due to the low base provided by 1QFY11, where sub-VFMs were illegally sold below the minimum retail price. Dunhill remains BATM’s crown jewel as other brands under its stable recorded negative or uninspiring growth. We are raising our FY12 and FY13 earnings forecast by 0.5-1.2%  following slightly stronger-thanforecasted volume, thus bumping up our FV to RM52.90. Maintain NEUTRAL.

Within estimates. BATM registered 1QFY12 revenue of RM1,042.8m (+5.1% y-o-y and +5.6% q-o-q on the back of stronger cigarette volumes), boosting earnings to RM194.5m (+8.9% y-o-y, +7.7% q-o-q). Net margins, meanwhile, broadened by 0.7 ppt y-o-y to 18.7%. This followed a 9.5% decline in operating expenses attributable to cost timing differences and a change in distribution strategy, whereby its previous in-house distribution operations have been outsourced to third-party partners. The company’s earnings for the quarter represented 26.6% of our forecast and 26.1% of consensus.

Shipments rise on low base. BATM’s 1QFY12 cigarette shipments rose by 4.5% y-o-y to 2.17bn sticks. This came on the back of a 1QFY11 quarter plagued with local subVFM brands being sold below the minimum retail price (MRP) of RM7 per 20-stick pack. Sub-VFM cigarettes (a segment in which BATM, JTI and Philip Morris  are not involved in) subsequently saw their volumes decline by 47.3% y-o-y following the government’s enforcement of the MRP. When compared to a more normalized 1Q, BATM’s 1QFY12 volume is still some 3.6% off that of 1QFY10. On a sequential basis, cigarette sales grew by 6.4%. This comes after a typical poor 4Q as traders and merchants hoard up on inventory in 3Q in anticipation of excise duty hikes in October.

Dunhill gains but not the rest. BATM’s flagship brand Dunhill continued its market share gains in the legal tobacco industry to claim 46.5% of the spoils in the quarter. Dunhill Lights breached the 3% market share mark for the first time to dethrone Marlboro Lights as the second most popular premium light cigarette, behind JTI’s Mild Seven. The rest of BATM’s portfolio, however, painted a different picture. The company saw its share in the VFM segment fall by 0.4 ppt as Pall Mall lost ground, while Peter Stuyvesant and BATM’s other premium brand Kent remained stagnant in terms of market share. Overall market share, nonetheless, rose to 62.5% from 59.3% in 4QFY11 as  the  total industry volume (including sub-VFM) grew by a slower 2.9%. CMTM’s shipment growth of 7.7% (compared to BATM’s 4.5%) implies that JTI and/or Philip Morris saw even stronger market share gains in the quarter.

Source: OSK188