Maintain BUY with unchanged DCF-TP of MYR15.20
4QFY21 results met both our/consensus expectations. As Malaysia gradually emerges from the pandemic, we believe sales volume should see a similar recovery in FY22. However, new regulations would pose a fresh risk to BAT’s earnings momentum in the longer-term if added restrictions are imposed on smokers below a certain age. No change to our earnings estimates. Maintain BUY with an attractive dividend yield of >7%. Our DCFTP of MYR15.20 is unchanged (WACC: 9.5%, LT growth rate: 2.5%).
Within expectations
BAT’s 4Q21 core net profit of MYR79m (+1% YoY, -3% QoQ) brought FY21 core net profit to MYR294m (+13% YoY), reflecting 95%/104% of our/consensus full year earnings estimates. A fourth interim DPS of 27sen was also declared which brought FY21 DPS to 98sen (FY21 DPR: 98%).
Sales volume growth is recovering nicely…
FY21 revenue grew 14% YoY on the back of (i) lower illicit share by 6.1ppts YoY (4Q20: c.63%), leading to (ii) volume growth in all its core cigarette segments (Premium: +1.9ppts YoY, Aspirational: +0.7ppts YoY, VFM: +1.5ppts YoY). BAT’s market share also grew marginally to 52.4% (+0.8ppts YoY). On a QoQ basis, 4Q21 revenue increased 41% QoQ in tandem with higher sales volume as movement restrictions eased. Pre-tax profit however grew by a narrower 1% QoQ given various significant strategic investments relating to its vape product (Vuse), we suspect.
… but potential new industry regulations are a risk
Into FY22, we expect earnings recovery to continue on an upward trajectory in the absence of operational disruption caused by pandemicled lockdowns. That said, the Health Ministry has publicly shared its intention to table a new Tobacco and Smoking Control Act in the upcoming Parliamentary meeting which will not only regulate e-cigarettes and vaping products, but will also seek to ban smoking for people born after 2005. If this is successfully tabled, this poses a long-term threat to BAT’s earnings and may also lead to higher illicit share if enforcement is insufficient.