21 July 2012
Summary of Analyst Report: British American Tobacco (M) Bhd (BAT) fair value at RM 54.22, Neutral- OSK Research
British American Tobacco (M) Bhd (BAT) posted revenue of RM1.07bil (representing a growth of 2.4% both year-on-year and quarter-on-quarter) and earnings of RM220.8mil (growth of 19.9% year-on-year and 13.5% quarter-on-quarter) for the second quarter ended June 30.
The company eked out marginal revenue gains despite stagnant shipment volume as it sold more premium segment cigarettes.
First half 2012 earnings totalled RM415.4mil (growth of 14.5% year-on-year) on the back of slightly stronger sales volume and substantially lower operating expenses. The first six months profits represented 56.5% and 55.6% of our and consensus estimates respectively.
The vast improvement in the first-half earnings came from a RM58.5mil reduction in operating expenses, of which RM13mil arose from cost recognition timing differences while the bulk of the remaining RM45.5mil reduction was attributed to lower provisions for staff incentives (for example, bonuses) and savings arising from BAT's move to outsource its distribution network in the fourth quarter of 2011.
Cost savings from a change in the company's distribution model is likely to have led to a RM15mil to RM16mil cost reduction, indicating that RM20mil to RM30mil of the remaining cost reduction probably came from lower allocation for staff compensation.
The revenue drivers were, and remained, unexciting. BAT sold 2.17 billion sticks during the second quarter (a drop of 1.2% year-on-year), boosting the second-half shipments to 4.34 billion sticks (a growth of 1.6% year-on-year).
The company's first-quarter volume picked up 4.5% year-on-year after a weak first quarter in 2011, during which sub value-for-money (VFM) brands were sold below the minimum retail price of RM7 per 20-stick pack.
Hence, the first-quarter volumes were still some 3.6% off the more normalised first quarter of 2010. In the second quarter, total industry volume (cigarettes from BAT, JT International and Philip Morris) rose by a much tamer 0.4% year-on-year following a 7.7% year-on-year jump in the first quarter.
The first batch of data on illicit cigarette from March to May show that 34.7% of the cigarettes consumed in the country were smuggled, down slightly by 0.1 percentage points from that of October to December 2011, and a 2.6 percentage point drop year-on-year.
The Government's decision not to increase excise duties in the previous Budget but to step up enforcement efforts and distribute cash payouts as part of its election campaign seemed to have helped curb the sale of illicit cigarettes.
The volume of cigarettes consumed (legal and illegal combined) was pretty much flat year-to-date. As expected, the premium segment's market share rose 3.9 percentage points, perhaps suggesting that consumers uptraded after receiving the Government's payouts.
Dunhill, the firm's flagship premium brand, saw market share grow by 3.1 percentage points compared with the first half of 2011.
Much of the market share growth was contributed by the traditional full-flavour Dunhill brand (a favourite among rural and elderly folks) rather than Dunhill Light or Dunhill Menthol. This further indicated that the Government payouts are encouraging aid recipients (mainly rural folk and senior citizens) to switch from illicits to legal Premium sticks.
BAT's share of the premium segment remained at 72% but saw its VFM market share ease by 1.3 percentage points to 41.3%.