BAT: Earnings plunged

Result Update

For QE31/12/2015, BAT's net profit dropped by 24% q-o-q or 6% y-o-y to RM196 million while revenue dropped by 9% q-o-q or 12% y-o-y to RM1.06 billion. The revenue dropped sequentially due to a 19.4%-drop in Domestic and Duty Free sales volume as a result of a 36%-jump in excise duties. This is compounded by a 8.5%-drop in Contract manufacturing volumes. The sharply lower revenue plus increased costs & timing differences in expenditures resulted in a decline in Gross Profit of 15%. Higher expenses incurred as a result of trade retail contracts & brand initiatives added to the woes, which led to a 21.5%-decline in operating profits.


Table: BAT's last 8 quarterly results


Chart 1: BAT's last 36 quarterly results

Putting 4Q2015 in perspective

In the past, BAT's 4th quarters had shown poorer result due to two reasons: Firstly, the effect of higher sales in the immediate preceding quarter as retailers or stockists bought ahead of the budget where excise duties increase would normally be announced. Secondly, it is the quarter when lumpy expenditures are booked in.

The latest 4th quarter is no exception. If we plot the chart of the past 11 4th quarterly results, we can see that the trend of profits is up. Nonetheless, the sharp drop in revenue is very glaringly. That is the result of the unexpectedly huge jump in excise duties (off-budget!!) as well as a significant drop in Manufacturing contract. The domestic sales is expected to recover in the next few quarters- leading to the continuation of the uptrend for profits.


Chart 2: BAT's last 11 4th Quarterly results

Valuation

BAT (closed at RM56.08 yesterday) is now trading at a PE of 17 times (based on the last 4 quarters' EPS of 318 sen). BAT paid out a dividend of RM3.12 for the last 4 quarters; thus giving a Dividend Yield of 5.6%. At these PER & DY, BAT is deemed fairly attractive.

Technical Outlook

BAT is in an uptrend line, with support at RM55.00.


Chart 3: BAT's daily chart as at Feb 17, 2016 (Source: ShareInvestor)

Conclusion

Despite the poorer financial performance, BAT is still a good stock for long-term investment. Its valuation is fairly attractive and its technical outlook is still positive. Thus, I revise my rating for BAT from a HOLD to ACCUMULATE.

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.