KUALA LUMPUR (July 29): AllianceDBS Research has downgraded British American Tobacco (M) Bhd to “Hold” with a lower target price of RM65 (from RM66.34) after the group reported 1H15 core net profit of RM455 million (+4.4% y-o-y), accounting for 48% of house full year estimate.

In a note today, AllianceDBS IB vice president for equity Cheah King Yoong said BAT’s 1H15 revenue declined 0.8% y-o-y, dragged by 9% contraction in sales volume and group’s absorption of GST.

Nonetheless, he explained that management was seeing signs that sales volumes are starting to recover.

“Despite the lower revenue, profitability improved driven by increased productivity.

“The group declared a second interim net DPS of 78 sen, bringing its year to date DPS to RM1.56. This represents a 97% payout ratio,” said Cheah.

He said despite the challenging operating environment, BAT has been able to improve its market share to 62.3% in 2Q (1Q: 61.1%), driven by an increase in popularity of its flagship Dunhill and Peter Stuyvesant brands.

“BAT has raised the price of a 20-stick pack by 30sen, effective June 29, to partly offset the impact of GST, which should improve its profit margins to a small extent.

“With the cut in earnings, we have accordingly lowered our target price to RM65, based on our DCF valuation. The group’s share price has appreciated by 8.5% since our upgrade at end-June and has exceeded our target price. Downgrade to Hold. Net yield of about 5% provides support to the share price,” he said.