KUALA LUMPUR (Feb 21): Shares in British American Tobacco (M) Bhd (BAT) gapped up this morning and rose as much as 9.9% after it posted a net profit of RM93.86 million in the fourth quarter ended Dec 31, 2019 on the back of revenue of RM662.45 million.

BAT declared a fourth interim dividend of 33 sen per share, which amounts to a RM94.22 million payout, payable on March 18. This brings its full FY19 dividend to 118 sen versus 155 sen for FY18.

At 10.31am, BAT was up 8.66% or RM1.10 to RM13.80, valuing it at RM3.94 billion. The stock had earlier risen to a high of RM14.10.

Meanwhile, Hong Leong IB Research (HLIB) maintained its “Buy” rating on BAT at RM12.70 with a higher target price (TP) of RM15 (from RM14.66) and said BAT’s core net profit of RM361.1 million (y-o-y: -22.9%) was above expectations, due to higher sales volumes and lower opex.

In a note today, HLIB said it expects BAT to continue to reduce costs in light of decline in sales volume.

“BAT guided they intend to continue the process of reducing staff headcount in FY20. The entire headcount reduction is expected to result in annual cost savings of about RM35 million.

“Furthermore, we expect BAT to spend significantly less on A&P given the reduction in potential market size. Given the unreasonably high price of premium brand Dunhill, we expect consumers to continue to down trade to VFM brand Rothmans, which has grown from 3.2% of the total legal market at the start of FY18 to 6.7% currently,” it said.

HLIB raised its FY20/21 earnings forecast by 2.2%/2.4% to account for lower operating expenses going forward.

“After adjusting for higher earnings, our DCF based TP (WACC: 9.5%, TG: 2.5%) is increased from RM14.66 to RM15.00,” it said.