Lower cigarette volume may affect BAT’s FY16 results

by **Cals** Tue 12 Jan 2016, 00:42

Lower cigarette volume may affect BAT’s FY16 results

By RHB Research / The Edge Financial Daily | January 11, 2016 : 10:10 AM MYT

This article first appeared in The Edge Financial Daily, on January 11, 2016.

[size=16]British American Tobacco (M) Bhd ([You must be registered and logged in to see this image.] Valuation: 1.50, Fundamental: 1.35)
(Jan 8, RM54.10)
Upgrade to neutral with a target price (TP) of RM54.50: British American Tobacco (M) Bhd’s (BAT) share price has corrected 12% since September 2015. We believe its current valuations have fairly priced in the steep excise duty-led price hike.

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We upgrade our call to “neutral” with an unchanged discounted cash flow (DCF)-based TP of RM54.50 (2% upside). The estimated dividend yield of 5.7% for financial year 2015 to 2017 (FY15 to FY17) should be supportive of the company’s share price.

We expect BAT’s FY16 earnings to be dragged down by lower cigarette volumes (down 14% year-on-year [y-o-y]), outweighing the RM3.20/pack excise duty-led price hike. Yet, we believe the 12 sen/stick excise duty hike is unlikely to be implemented annually, but rather reverted to three sen/stick going forward.

This is as authorities strike a balance between enforcing a clampdown on illicit cigarettes and revenue losses attributed to their proliferation.

The Rakyat Post reported illegal cigarettes comprising about 45% of the cigarette trade in the weeks post the price hike, up from the yearly one-third average.

Restrictive policies on vaping implemented by various state governments have gathered momentum over the past few weeks. However, historical price elasticity trends suggest the double price hikes in cigarettes (November 2014 and June 2015) would have accounted for close to a 6% drop in volume. Correspondingly, the clampdown on vaping (with a 50% success rate) boosts the industry cigarette volume by a mere 2%.

While we leave our earnings estimates unchanged, key risks include increased proliferation of illicit cigarettes, sales cannibalisation of e-cigarettes despite bans by some state governments, and the lower-than-expected cigarette consumption arising from higher living costs.

We believe that the current valuation of 17.3 times FY16 price-earnings ratio (PER) (less than -2SD [standard deviation] of its historical three-year mean) fairly reflects BAT’s flat earnings growth. Therefore, we upgrade our call to “neutral” as we maintain our DCF-based TP of RM54.50.

The company’s gearing of 52% (past five-year average: 76%) allows for some flexibility in its capital management to maintain its dividend per share going forward. The estimated dividend yield of 5.7% for FY15 to FY17 should be supportive of its share price. — RHB Research ([You must be registered and logged in to see this image.] Valuation: 1.35, Fundamental: 1.10), Jan 8
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