Cut in operating costs ‘positive’ for BAT

But lower dividend payout among downside risks for firm

PETALING JAYA: Strong quarter-on-quarter sales volume rebound and an aggressive cut in operating costs are potential re-rating catalysts for British American Tobacco (M) Bhd.

However, CGS-CIMB Research said BAT’S downside risks revolve around a larger-than expected drop in sales volume and a lower dividend payout.

“We like the stock as it offers a 30.6% potential upside to our RM14.81 dividend discount model based target price and dividend yields of 8.3-9.5% for the financial year (FY) 202022,’’ the house said.

BAT share price rose two sen in yesterday’s close to RM10.90.

CGS-CIMB said BAT new managing director Jonathan Reed’s recent suggestion that BAT’S FY20 turnover growth hinges on rectifying the legal tobacco industry’s structural problems seems to be an implicit admission that the group expects another year of declining financials.

“While we expect BAT to perform better half-on-half in the second half of 2020, we have also forecast an 18% year-on-year (yoy) decline in the group’s FY20 revenue and net profit,’’ the house said.

Early this week, Reed issued a statement urging the public and BAT’S shareholders to be more vocal in compelling the government to implement the necessary structural reforms to reverse the declining demand for legal tobacco products.

The government may have somewhat strengthened its border controls to tackle smuggling, but Reed said “more drastic and radical actions are required” to put an end to the illegal trade, which commands 70.3% of Malaysia’s enlarged tobacco market.

“We do not see this (Reed’s) statement as a knee-jerk reaction to BAT’S first quarter 2020 results, which saw sales volume down by 22.5% yoy and core net profit down by 38.2% yoy,’’ the house said

“We think that the market overreacted to the 1Q20 results.

“We are of the view that the yoy and quarter-on-quarter declines accelerated because of the movement control order (MCO) disrupting BAT’S distribution channels, which consequently affected supply to the retail stores,’’ CGS-CIMB said.

With that, smokers who prefer Dunhill or other BAT brands would either have to turn to illegal products or cut down their cigarette intake during the stay-at-home order,’’ the house added.

In May, BAT announced a 42.7% yoy decline in net profit to Rm50.8mil for the first quarter ended March 31, 2020.