KUALA LUMPUR (May 21): British American Tobacco (Malaysia) Bhd (BAT) emerged as top loser in morning trade, falling as much as 12.33% or RM1.64 to RM11.66, following the tobacco company's weaker-than-expected earnings.

A cursory check on BAT's history showed that this was the lowest dividend it has declared in 21 years, since it was formed from the merger of Rothmans of Pall Mall (Malaysia) Bhd and Malaysian Tobacco Company Bhd on Nov 3, 1999.

While analysts generally said the counter's earnings of RM50.77 million for the first quarter of financial year 2020 (1QFY20) missed their estimates, they are mixed about their recommendations.

Both Kenanga Research and Affin Hwang Capital Research have downgraded their recommendations. Kenanga Research has downgraded BAT to "underperform" while Affin Hwang Capital Research has downgraded it to "sell".

They said BAT's dividend yield of about 6% is not appealing to accumulate its shares given the risk of further earnings contraction amid this challenging operating environment.

However, for analysts with a "buy" call for BAT, like MIDF Research and CGS-CIMB Research, they view BAT's dividend yield as attractive and expect the company's bottom line to improve following the headcount restructuring exercise and easing of lockdown restrictions.

Kenanga Research, which has lowered its target price to RM10.05, from RM15.50 previously, expects BAT's outlook to remain bleak, as economic impact from the pandemic is likely to have a prolonged effect on its profitability by aggravating its already harsh operating environment.

"Weaker purchasing power caused by a disrupted economy may very well exacerbate the issue of affordability, and divert smokers to illicit cigarettes (currently taking up about 69% of market share).

"Therefore, we maintain our view that any meaningful recovery would only materialise with a sustained clampdown on illegal cigarettes," it added.

BAT posted a core net profit of RM55 million for 1QFY20, missing Kenanga Research's and consensus full-year estimates, accounting for 16% and 17%, respectively. The research house said the shortfall was mainly due to the worse-than-expected contraction in product volume.

Kenanga Research added that the dividend declared of 17 sen also missed its expectations, in line with weaker earnings.

Following the weaker-than-expected 1QFY20 results, Kenanga Research has revised downward its earnings forecasts by 35.1% to RM221.1 million for FY20 and slashed 32.1% to RM220.8 million for FY21.

Similarly, Affin Hwang Capital Research, which has upgraded its target price to RM9.50, has cut its earnings projection from 2% and up to 12% for FY20 to FY22, after factoring in higher operating expenditure. As such, the research house anticipates BAT to generate an annual profit of RM252.2 million for FY20, RM246.9 million for FY21, and RM269.4 million for FY22.

This translates into earnings per share of 88.3 sen, 86.5 sen, and 94.3 sen.

Following lower earnings estimates, Affin Hwang Capital Research expects BAT to deliver lower dividend yields going forward. It expects BAT to deliver dividend yields of 6% for FY20 (net dividend per share (DPS): 79.5 sen), 5.9% (net DPS: 77.9 sen) for FY21 and 6.4% for FY22 (net DPS: 85 sen).

In FY19, BAT delivered a net DPS of 118 sen, translating into a dividend yield of 8.9%.

Meanwhile, CGS-CIMB Research, who has retained "add" call with unchanged target price of RM14.81, expects BAT to deliver a dividend yield of 7.8% (DPS: RM1.03) for FY20, 7.6% (DPS: RM1.01) for FY21 and 6.8% (DPS: 90sen) for FY22.

Despite BAT's core net profit missing CGS-CIMB Research's FY20 estimates, it expects sales to normalise in the subsequent quarters with the easing of lockdown restrictions.

CGS-CIMB Research also expects the group's fixed costs to trend lower following the headcount rationalisation exercise completed in March this year and suspension of marketing activities.

MIDF Research, which has maintained a "buy" call and revised lower its target price to RM15.70, from RM16 previously, said despite the industry headwinds persisting in the foreseeable future, the research house applauded BAT's restructuring exercises which it said will show positive results when the business environment improves.

Also, MIDF Research said BAT's dividend yield is still attractive. It anticipates BAT to deliver a dividend yield of 7.5% (DPS: 99.5 sen) for FY20, 8.3% (DPS: 110.2 sen) for FY21 and 9.1% (DPS: 121.6 sen) for FY22.

At noon break, BAT pared some of its losses and traded at RM11.74, still down by 11.73% or RM1.56, bringing it market capitalisation of RM3.4 billion.

However, the share price has recovered 27% from its lowest point RM9.26 on March 23.