Analysts flag concerns about BAT’s sales outlook

This is due a poor 1H20 blighted by a disruption in its distribution chain


BRITISH American Tobacco (M) Bhd (BAT)’s first half of 2021 (1H21) core net profit revealed a growth of 16.3% year-on-year (YoY), after a poor 1H20 blighted by a disruption in its distribution chain.

CGS-CIMB Research analyst Kamarul Anwar said the cigarette trader’s RM134.7 million 1H21 core net profit constituted 47% of the broker’s full-year forecast and 48% of consensus, and BAT tends to record better sales volume in the 2H.

“Despite fears of value-for-money (VFM) cigarettes’ rising popularity eating into its margins, BAT’s flagship brand Dunhill’s legal market share inched up 2.7% pts YoY in 1H21. This consequently stabilised its 1H21 gross margin at 25.1% from 25.9% in 1H20,” Kamarul stated in his report yesterday.

BAT has announced a 24 sen for its second interim dividend per share (DPS) which brings its yearto-date (YTD) DPS to 45 sen, translating into a 96% payout ratio.

The group’s sales volume inched up 5.1% quarter-on-quarter (QoQ) in the second quarter (2Q), raising revenue by 5.2% QoQ.

“June 2021’s sales, however, plummeted to 172 million sticks, nearly 42% lower than in the first five months 2021’s monthly average of 295.4 million. The better performance in 2Q21’s earlier months lifted the quarter’s core net profit 13.5% QoQ to RM71.6 million,” Kamarul noted.

According to BAT’s exchange filing last week, the deterioration was due to the Full Movement Control Order (FMCO) that began last month.

The drop in sales volume could be cause for alarm because most of Malaysia is still under some degree of a full lockdown and unemployment is growing which could be a bad omen for BAT’s 2H21 sales outlook, the CGS-CIMB report stated.

“We believe the drastic regression in June sales volume could also be due to smokers’ tighter purse strings following spending for Raya preparations in May. Given the inclement economic conditions, these smokers may have chosen to be economical after making one-off spending for the religious celebration,” Kamarul wrote.

CGS-CIMB reiterated its ‘Hold’ call on BAT and based on dividend discount model set a target price (TP) of RM15.40 on the company while keeping its earnings per share and DPS forecast for financial year 2021-2023 forecast steady.

BAT’s sales are heavily dependent on Malaysia’s economy bouncing back once the country reaches herd immunity, while legalising e-cigarettes and vaporiser products are the stock’s long-term catalyst, the report added.

BAT’s 1H21 core net profit was above Hong Leong Investment Bank Bhd (HLIB) estimation.

The higher revenue of 5.2% and core profit after tax (PAT) of 13.5% were due to higher share of the legal market at 52.5%.

“The revenue rose 9% YoY and 13.1% YTD due to higher volumes as a result of lower illicit trade activity, growths in market share in premium brand Dunhill, aspirational brands Peter Stuyvesant and Pall Mall as well as VFM brands Rothmans and KYO,” HLIB analyst Gan Huan Wen noted.

Compared to its 1H20 which was impacted by higher operating expenses from restructuring, BAT core PAT rose 17.1% YoY and 16% YTD this year.

“We are encouraged by the recovery in legal market volumes which grew 12% in 1H21, albeit from a low base due to the first MCO in 2020. It appears that measures from Budget 2021 which included various transhipment restrictions, have resulted in illicit market share declining by 6.2 ppt to 57.9% from December 2020 to May 2021,” Gan added.

HLIB expects BAT’s profitability to be under pressure as consumers down trade to VFM brands from premium brands but expects the significant clampdown in illicit activity will likely compensate.

“While we expect the 3Q profitability to be affected by the MCO implementation as June volumes were greatly impacted, we are encouraged by the promising clampdown on illicit activity,” Gan stated.

HLIB upgraded BAT to ‘Hold’ with TP rising to RM12.95 from RM11.75 previously based on an unchanged discounted cashflow valuation methodology.

BAT shares closed 16 sen higher at RM14.58 in thin trade yesterday.


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