KUALA LUMPUR (Oct 28): British American Tobacco (Malaysia) Bhd's (BAT) share price rose as much as 14 sen in the early morning trading session on Friday (Oct 28), after its net profit for the third quarter ended Sept 30, 2022 (3QFY2022) exceeded analysts’ expectations.
The counter, which opened from its previous closing price of RM10.46, climbed 14 sen or 1.34% to a high of RM10.60 within the first hour of trading.
At 10.02am, the stock had pared its gains, but was still up four sen or 0.38% at RM10.50, bringing the group a market capitalisation of RM3 billion, with 92,300 shares transacted.
On Thursday, BAT reported that its net profit for 3QFY2022 dropped by 4.34% to RM75.25 million, from RM78.67 million a year ago, due to non-deductible expenses and the one-off prosperity tax known as Cukai Makmur introduced this year, which is chargeable for income of above RM100 million.
Quarterly revenue grew by 8.78% to RM666.9 million, against RM613.02 million, driven by a 4.9% increase in volume, as the market continued to return to normalcy following the reopening of the economy.
The group declared a third interim dividend of 25 sen per share — payable on Nov 18 — bringing the total declared to 67 sen so far this year. The third interim dividend amounting to RM71.38 million represents a 95% payout ratio.
For the first nine months ended Sept 30, 2022 (9MFY2022), net profit fell 5.9% to RM200.79 million, against RM213.4 million a year earlier, while revenue for the same period increased 2.9% to RM1.83 billion, from RM1.78 billion registered a year ago.
Hong Leong Investment Bank Research analyst Sam Jun Kit in a note on Friday said BAT’s 9MFY2022 core profit after tax of RM212.7 million came in above expectations at 85.6% of the research house's full-year forecast, and 82.1% of the consensus, and that the outperformance was a result of stronger-than-expected cigarette sales.
However, he kept his earnings forecasts unchanged, pending BAT’s analyst briefing. Sam maintained his “hold” call, with a target price (TP) of RM11.13 for BAT.
“Encouragingly, the positive momentum that was seen in 2QFY2022 continued into 3Q, with illicit market share easing to 56.1% versus 57.7% in 2Q.
“That being said, consumer down-trading activities are anticipated to persist amid the uptick in living cost, resulting in slimmer margins, not to mention the higher living cost could also fuel the illicit market and cannibalise BAT’s sales,” he wrote.
Meanwhile, Sam noted further that BAT’s vape product (Vuse) launch will be deferred. The Control of Tobacco Products and Smoking Bill was put on hold due to the dissolution of Parliament.
The extensive range of vape products in the market currently may hamper BAT’s vape product from penetrating the market when the company is given the green light to launch it, Sam opined.
This, he said, is also compounded by the ruling of the RM1.20/ml excise duty on vape gels and liquids that could potentially give rise to an illicit market, as it will more than double the price of some of the nicotine-based vape liquids that are currently sold in the grey market.
Kenanga Research analyst Tan Jia Hui concurred, and noted that BAT’s 9MFY2022 results came in slightly above her expectations, as sales volume increased more than expected following the full reopening of the economy.
While the top line held strong, Tan said BAT’s earnings before interest, tax, depreciation and amortisation (Ebitda) margin took a minor hit, due to an increase in operating expenses.
Looking ahead, Tan expects BAT’s earnings to be sustained at current levels going into 4QFY2022, with the group expected to continue to benefit from the full reopening of the economy, while the resumption of international tourism and travel is expected to bump up duty-free sales.
However, she remains cautious about inflationary pressure and rising interest rates eating into consumers' spending power, as she believes continued contractions in the premium and mid-range segments, coupled with an increase in the value-for-money market's share, could indicate some down-trading within the customer base.
Looking at government regulations, she also viewed that the proposed legislation has sent mixed signals for BAT's outlook.
On a positive note, Tan said the proposed tightening of borders to combat smugglers as proposed in Budget 2023 is expected to have a positive effect on the group, as the black market continues to be the main concern for the sector, controlling a majority of overall market share at 57.7% as of May 2022.
“Conversely, the generational ban on smoking and vapour products limits the group’s long-term growth, though the effects are not expected to be heavy in the short term, given the relatively small size of the targeted age demographic of 18 to 21,” she said.
Nonetheless, she increased her FY2022/23 core net profit forecasts by 5.8%/3.1% to reflect the increased volume, as well as raising her FY2022/23 dividend forecasts to nine/9.2 sen to reflect the increased earnings.
Meanwhile, Tan maintained her “market perform” call on BAT, due to limited catalysts for long-term growth, amid rising health consciousness and limited growth due to government regulations.
However, she has given BAT a higher TP of RM11.45, from RM11.20 previously, to reflect stronger earnings for FY2022/23.
“While the stock may appeal to yield seekers due to its high dividend yield of 8.7%, we also see limited prospects given the rising interest rate environment,” she added.