A Customs enforcement officer showing the seized illicit cigarettes of various brands at a grocery shop in Taman Alma Jaya, Bukit Mertajam.STAR PIC BY : ZAINUDIN AHAD / 20 March 2014 / Reporter: Tan Sin Chow.
KUALA LUMPUR: CIMB Equities Research has upgraded British American Tobacco (M) Bhd
(BAT) to Add with an unchanged target price of RM 51.
It said on Tuesday BAT’s share price is down 13.4% since the Q1, 2016 results and pockets of value have emerged. Its last traded price was RM47.22.
“Worth a revisit based on: i) dividends of 5.5-5.9% for FY16-18F, ii) month-on-month increase in sales volume, and iii) reduced risk of excise duty hikes.
“Market yet to price in positives from its restructuring plans. Potential special dividend of 71 sen to 78 sen a share from land sale,” it said.
To recap, CIMB Research believes the sell-off was due to concerns over its declining sales volume, which led to a 27.9% on-year earnings decline in 1QFY16.
Monthly legal industry volumes declined by 29.7% while BAT recorded a steeper volume drop of 34.1%. Furthermore, contraband cigarette volumes spiked to an all-time high of 45.6% in March 2016 as customers turn to cheaper alternatives.
At current prices, the stock is worth a revisit because of the compelling dividend yields of 5.5-5.9% for FY16-18F while sales volume are showing a month-on-month pick-up, and the government potentially putting off further excise hikes this year.
“We believe these are substantial reasons to revisit this stock despite the company’s unexciting earnings outlook due to uncertainties surrounding its restructuring plans. We also see limited downside risk to the share price thanks to the support from its dividend yields.
“Furthermore, we believe that the market have yet to price in positives from its restructuring plans. To recap, BAT will cease all manufacturing activities by 2H17 and focus solely on local retail activities using outsourced products from selected regional BAT factories.
“We note that management is confident that overall margins can increase with its restructuring plan. This is after taking into account that it is no longer sustainable to manufacture locally given its under utilised capacity and the yearly hikes in duties,” it said.
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