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Friday, November 1, 2019

Kenanga downgrades BAT, cuts TP to RM18.30

ANALYST REPORTS
Friday, 01 Nov 20198:59 AM MYT

KUALA LUMPUR: British American Tobacco (Malaysia) Bhd's (BAT) "heat-not-burn" products are not expected to deliver meaningful contributions in the near term, says Kenanga research.

The research house said in a note that the Glo and refillable Neo sticks could re-establish its presence in the new market but is not expected to be significant to earnings with an expected contribution of less than 5% of the group's FY20 sales.

BAT has been plagued by dwindling market volumes and a poorer product mix as evidenced by its disappointing 9MFY19 results, which saw net profit plunge 30% year-on-year to RM248mil.

The performance missed Kenanga's and consensus estimates at 68% and 66% of their full-year forecasts respectively.

"The underperformance is largely due to worse-than-expected decline in both industry volume (-4% QoQ) and BAT volume (-8% QoQ), coupled with the continual down-trading to lower-margin Value-for-Money (VFM) offerings," said Kenanga.

To tackle the slide in its fortunes, BAT is taking initiatives to implement more prudent cost constrols, particularly in marketing spend, which coupled with an internal reorganisation, could mean lower opex in the coming quarters.

Kenanga noted that the key challenges to the group remain the affordability issue, the illicit tobacco trade and a change in consumer preference towards vape products.

However, meaningful improvement in BAT"s fundamentals could only come from a sustained curb of illegal trades, it added.

Kenanga downgraded BAT to market perform with a lower target price of RM18.30 from RM23.10 previously.

"As we relooked at our valuations and applied a 16x PER (closely in-line with the stock’s -2.0SD over its 3-year mean), we trimmed our FY19E/FY20E earnings by 8%/11% to account for dwindling sales volume and poorer product mix," it said.

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