British American Tobacco - 3Q12 results above expectations

Period    3Q12 

Actual vs. Expectations   The 9M12 net profit (“NP”) of RM601m was slightly above expectations, making up 77.1% and 82.7% of the street’s and our expectations of RM780m and RM727m respectively.

Dividends   A third interim NDPS of 65 sen was declared, which totalled up to 195 sen or 78% thus far of our full year FY12E NDPS of 250 sen (which works out to a 3.8% yield). 

Key Results Highlights  QoQ, the NP declined 15.9% in 3Q12 despite the high single digit revenue growth of 8.6%. This was mainly due to higher operating expenses incurred in the quarter due to the timing of brand and trade related activities. Note that the company usually spends lesser in the 1H as compared to the 2H.

 YoY, the NP improved 5.3% to RM186m in 3Q12 on the back of a better sales growth of 5.0% despite the lower YoY overall sales volume. This was mainly driven by the strong performance of Dunhill in 3Q12, which saw its market share improved significantly from 45.4% to 47.6% compared to the same quarter last year.

 As a result, 9M12 reported a set of pretty good results. The revenue for the period improved marginally YoY by 4.2% due to the increase in contract manufacturing volume, which mitigated the lower domestic sales revenue and the one-off recognition of distribution costs. NP also increased 11.5% YoY, mainly attributable to a lower operating cost, which fell 17.7%.

Outlook   The continuous enforcement activities against subVFM selling below the Government mandated minimum price as well as the curbing of illegal cigarettes will continue to benefit BAT especially  in gaining market shares in the premium segment.

Change to Forecasts

 Due to the lower operating costs seen thus far, we are raising our FY12E-FY13E earnings estimates from RM727.3m and RM728.9m to RM787.0 and RM789.0 respectively via cutting our operating expenses estimates by about 14%.  

Rating  Maintain MARKET PERFORM

Valuation    We are raising our TP from RM58.70 to RM66.30, which is based on a 24x PER over the FY13 EPS of 276 sen (see overleaf for details).

Risks   The Government may potentially increase excise duty after the general elections, which may have a negative impact to BAT or the legal tobacco industry.  

Source: Kenanga