KUALA LUMPUR (Feb 9): Analysts with Hong Leong Investment Bank (HLIB) and Kenanga Research have raised their target prices (TPs) for British American Tobacco (Malaysia) Bhd (BAT Malaysia) after its results for the financial year ended Dec 31, 2022 (FY2022) met their estimates.

In a note on Thursday (Feb 9), HLIB analyst Sam Jun Kit wrote that he raised BAT Malaysia's TP to RM12.35 from RM12.08 earlier, as he rolled forward the valuation base year to FY2023, based on an unchanged discounted cash flow (DCF) valuation (WACC: 9.5%; TG: 0.0%).

"However, we downgrade BAT’s rating to 'hold' (from 'buy') due to limited upside following the recent run-up in its share price (up 23% since our last upgrade on Nov 18, 2022)," he wrote.

Sam noted that measures introduced by the previous government to rein in illicit cigarettes, if maintained in the new Budget 2023, should help BAT Malaysia achieve higher sales volume.

"Meanwhile, the implementation of GEG [the generational end game] is expected to be deferred as the Tobacco Bill will need to start over from the first reading in the Dewan Rakyat. Not to mention if there is a need for further amendment to the bill requested from the newly formed parliament, this would delay it further," he added.

Kenanga Research's Jack Lai Yuan Khai raised BAT Malaysia's TP to RM12 from RM11.45, while maintaining its "market perform" call.

"While the stock may appeal to yield seekers due to its high dividend yield of 7.7%, we also see limited prospects given the rising interest rate environment," Lai wrote in a note on Thursday.

"While we expect sales volume to sustain going into FY2023, we remain cautious given the continued trend of downtrading within the market. If inflation continues to bite into consumer spending, the group could see a further increase in downtrading from their higher margin segments or even to black market cigarettes which could jeopardise earnings.

"Given the group controls the lion’s share of the premium segment, their leading Dunhill brand could be at risk of losing volume if consumer sentiment worsens.

"Conversely, looking to government regulation paints a slightly brighter picture for FY2023. While Budget 2023 is pending re-tabling later in February, the group was largely positive on the measures proposed in the previous version. Subsidies and cash hand-outs would support consumer spending and the regulations by the Multi Action Task Force were largely in line with those proposed during the group’s meetings with government officials.

"Recall, during 3QFY2022, Malaysia saw a 1.6 percentage point decrease in illicit volume following an uptick of inland seizures. The group is also not immediately concerned with the generational ban on cigarettes given it has also yet to be re-tabled," he wrote.

On Wednesday, BAT Malaysia posted its second straight quarterly net profit decline in the fourth quarter ended Dec 31, 2022, reporting a net profit of RM61.73 million compared with RM71.46 million a year ago. The decline was partly due to the one-off prosperity tax of 33%.

Quarterly revenue fell 10.6% to RM770.66 million from RM861.89 million. Nevertheless, the group declared a fourth interim dividend of 21 sen per share, amounting to RM60 million.

For the full year, BAT Malaysia’s net profit was down 7.8% to RM262.52 million from RM284.86 million in FY2021, as revenue slipped 1.54% to RM2.6 billion from RM2.64 billion.

At the time of writing, the counter topped the loser's list on Bursa Malaysia, down 50 sen or 3.91% to RM12.30, giving it a market capitalisation of RM3.51 billion.

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