British American Tobacco Malaysia

(Sept 11: RM18.80)

MAINTAIN OUTPERFORM. During the non-deal roadshow with British American Tobacco’s (BAT) management in Singapore, the government’s lack of success in clamping down the illicit market was a key topic in most meetings. The illicit market has become too widespread and needs more concerted efforts to be tackled; the rise in fake tax stamps and vaping, which are currently unregulated, do not help the case. Budget 2020 will unlikely see any excise hikes, regulation of vaping should take place by early next year, and there is a newly set-up task force by the government to come up with new solutions to control the illegal market as well as address affordability. In view of events trundling slower than expected, we cut FY2019-FY2021 EPS by 6% to 16% and have a new price target of RM27 (from RM33.3). We are one of the lonely bulls for BAT; timing wise, it might be too early but everything has a price, and we see value at these levels, with the stock having underperformed significantly. Stock trades at 12x FY2020 PER, offering 7.8% dividend yield. —