Times can be tough for all smokers
? British American Tobacco’s (BAT) FY21 core net profit came to 99% of our full-year estimate. FY21 sales volume was up 9.7%, riding the pandemic.
? The increasing prices of daily goods, we fear, could lead to smokers dialing back on their cigarette purchase. We cut FY22-23F EPS by 4-10%.
? Our DDM-based TP declines to RM9.96. We are unenthused by BAT’s upcoming vape gambit, given the high proposed excise duties.
FY21 core net profit within expectation
Benefiting from the stay-at-home boredom and a lower supply of illicit cigarettes, BAT’s sales volume rose 9.7% yoy in FY21, leading to its turnover jumping 13.9% yoy to RM2.6bn. Although the market share of its flagship brand Dunhill in the premium segment perked up 1.9% pts in FY21, BA T’s FY21 gross margin crept down from 25.8% in FY20 to 25.6%. We suspect this was due to smokers down-trading from the mid-tier segment to the value-for-money (VFM) lines; BAT’s VFM market share rose 1.9% pts in
FY21. BAT’s FY21 core net profit came to RM285.1m (+9.5% yoy), at 99% of our full-year forecast, and 100% of Bloomberg consensus. BAT’s fourth interim DPS of 27 sen brought its full-year DPS to 98 sen; we had expected 99 sen.
4Q21 core net profit down 9.5% qoq on higher expenses
4Q21 revenue surged 40.6% qoq, thanks to the reopening of the tourism sector and the consequent lift in its duty-free cigarette sales. Alas, 4Q21 core net profit fell 9.5% qoq as the qoq growth in its operating expenses outpaced that of its revenue because BAT made some initial investments in its upcoming vaporiser products.
Tempering our expectation for FY22F and beyond
The economic reopening, in our view , would leave smokers with less budget for their cigarettes since they would have other expenses to think about, i.e. expenses they likely saved on during the lockdown, e.g. fuel and eating out. It is telling that there was downtrading already in 4Q21, as reflected in its gross margin declining 80bp qoq to 25.6%. With the disruption in the global supply chain pushing up prices of daily necessities, w e are concerned that the qoq margin squeeze in 4Q21 presages more down-trading in 2022F. We cut FY22-23F EPS by 4-10% to reflect lower sales volume, more purchases of VFM cigarettes, and higher marketing expenses for BAT’s vapes.
Reiterate Reduce; DDM-based TP lowered to RM9.96
We have not incorporated vape sales in our FY22-24F forecasts since w e do not know the pricing and cost structures yet but w e doubt the vapes would move the needle in their early years. Gestation period is one cause, but w e are more concerned vapers would be repelled by the high excise duties proposed for vape liquid. Our DDM-based TP drops to RM9.96 as w e cut our FY22-24F DPS forecasts. Potential de-rating catalysts are low er sales and more down-trading. Upside risks: the government rescinds the “generation end game” proposal for cigarette sales and reduces the vape liquid excise duty.