BAT: Earnings Plummeted

Result Update
For QE30/6/2016, BAT's net profit dropped by 72% q-o-q or 78% y-o-y to RM48 million while revenue dropped by 6% q-o-q or 12% y-o-y to RM963 million. This is the first time since 2011 that BAT's quarterly revenue had dropped below the RM1 billion mark!

The drop in revenue was due to the following:

• Group’s Domestic and Duty Free recorded a q-o-q decline of 9.1% due to the continued impact of the November 2015 excise led price increase as well as reduced consumption during the fasting month
• Contract Manufacturing volumes declined 11.1% q-o-q

The weak volume performance coupled with inflationary increases in costs and timing differences in expenditures, caused the revenue and gross profit to decline q-o-q by 5.7% and 8.1% respectively.

During the same period, the Group has made a provision for restructuring expenses of RM86 million in relation to the winding down of its factory operations. As a result, Profit from Operations declined 49.6% q-o-q to RM117million. Excluding the impact of one-off restructuring expenses above mentioned, Profit from Operations registered a decline of 13.1% (or, RM31 million) versus the first quarter of 2016.

Net profit dropped by 72.7% q-o-q due to higher effective tax rate of 36% (as compared to 25% previously) as restructuring expenses in relation to the cessation of factory operations were non-deductible.

Table 1: BAT's last 8 quarterly results


Chart 1: BAT's last 38 quarterly results

Below, I tabulated BAT's last 8 quarters' P&L after excluding the restructuring expenses of RM86 million. While the drop in warnings is still bad, it was not so disastrous. Net profit would be lowered by 12% q-o-q or 29% y-o-y to RM152 million. EPS would improve from 236.sen to 273 sen.


Table 2: BAT's last 8 quarterly results (Restructuring expenses in QE30/6/2016 excluded)


Chart 2: BAT's last 38 quarterly results (Restructuring expenses in QE30/6/2016 excluded)
  
Valuation

BAT (closed at RM56.00yesterday) is now trading at an adjusted PE of 20.5 times (based on the last 4 quarters' adjusted EPS of 273 sen). However, this adjusted EPS of 273 sen may not be the earning going forward. If the earning going forward is similar to QE30/6/2016, then full-year EPS would be 214 sen. Thus forward PER would be 26 times. Compare this with HEIM & Carlsbg's PER of 21 times & 19 times respectively, BAT appears more expensive.

In addition, BAT has paid out a quarterly dividend of 78 sen; thus giving a Dividend Yield of 5.6%. The dividend payment has declined in line with lower earning to 55 sen last quarter and 45 sen in the latest quarter. Assuming the dividend payment stabilized ta 45 sen a quarter, its DY would be 3.2%. Again, this compared less favorably to HEIM & Carlsbg's DY of 4.6% & 5.2% respectively.

Technical Outlook

BAT peaked at RM74 in 2014. Its steady decline over the past 2 years picked up momentum due to poor financial performance after the sharp rise in excise duties on cigarettes in 2015. The drop was so severe that the share price went thru the long-term uptrend line support at RM50-51.00 mark.


Chart 3: BAT's monthly chart as at July 26, 2016 (Source: ShareInvestor)

BAT has since rebounded but its upside is capped by the intermediate downtrend line at RM56.00.


Chart 4: BAT's weekly chart as at July 26, 2016 (Source: ShareInvestor)

Conclusion

Based on the poorer financial performance, unattractive valuation & bearish technical outlook, BAT is rated a SELL. If you want to be invested in beer & cigarette stocks, my preference is for Carlsbg.

Note: 
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, BAT.