Kenanga upgrades BAT to 'outperform' on higher product volume growth

KUALA LUMPUR: Despite the still-cloudy outlook, Kenanga Investment Bank Research has upgraded British American Tobacco (M) Bhd (BAT) following its recent earnings outperformance.

The research house promoted the stock to "outperform" and raised its target price to RM11.05 in line with an increase in its earnings forecasts.

"Post-results, we bumped our FY20E and FY21E earnings upwards by 9.8% and 12.5%, respectively, by pencilling in more generous assumption for product volumes growth.

"NDPS were also adjusted upwards accordingly to 80.0 sen and 82.0 sen, respectively, by maintaining a pay-out assumption of 94%," said Kenanga.

It added that the stock's current valuations are undemanding at 11.4x FY21 price-earnings while the generous dividend yield of about 8% make it an attractive dividend play.

Nevertheless, the research house noted the operating environment remains harsh for the group due to the dwindling industry volume and poorer product mix, which would lead to thinner margins.

"Weaker purchasing power caused by a Covid-19-disrupted economy may also very well exacerbate the issue of affordability, further diverting smokers to illicit cigarettes and vaping products.

"Therefore, we maintain our view that any meaningful earnings recovery would only materialise with a sustained clampdown on illegal cigarettes (which currently takes up c.70% of market share)," it said.

BAT's 9MFY20 core net profit of RM183.1mil was above Kenanga's expectation at 83% of full-year forecast, but was within consensus at 74% of its 2020 estimate.

However, the nine-month revenue remained 10% lower than in the corresponding period last year due to the rampant illicit market volume, persistent shrinkage in BAT product volume and weaker duty-free sale amid the Covid-19 travel restrictions.

Core net profit was 26% lower year-on-year (y-o-y) as core EBIT margin was pressured by downtrading to lower margin VFM products.

The slimmer margin was slightly supported by the group's cost rationalisation exercise, which le to a 5% fall in Opex y-o-y.
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