BAT: Rising from the Ashes

BAT share price has been dropping for so long that many investors have learned to avoid the stock. See the monthly chart below.

Chart 1: BAT's monthly chart as at May 4, 2020 (Source: Malaysiastock.biz)

The share price decline is brought on by the decline in revenue and profits. I have constructed a graph of BAT's rolling 4 quarters' revenue and profits, excluding lumpy restructuring expenses, from Dec 2007 up to Dec 2019.

Graph: BAT's rolling 4-quarter revenue and profit from Dec 2007 to Dec 2019

The latest quarterly results will be announced in 3 weeks' time. It will probably show further decline in revenue and profits. If that panned out, we can expect share prices, which have rallied from RM10 to RM13, may renew their decline. Why are investors buying into BAT shares now or in the near future?

The Investment Case for Buying BAT 

1) The share price has broken above the medium-term downtrend line, RR at RM12.00.


Chart 2: BAT's daily chart as at May 4, 2020 (Source: Malaysiastock.biz)

2) It is a well-managed multinational company. The downside is its products pose health risks which led to legal restrictions being imposed which curtailed its consumption.

3) BAT is trading at a fairly attractive valuation with PER at 10.9 times an dividend yield at 8.9%.

4) Due to poor enforcement, illegal cigarettes are widely available in Malaysia, and these compete very successfully against BAT's products as their selling prices are substantially lower. The result of this illegal trades is lower sales for cigarettes manufacturers, leading to plant shutdown and loss of employment. An example is BAT shutting down its main factory in Petaling Jaya, and moving its production to Indonesia. In addition, Malaysian government loses more than RM5 billion annually in term of duties/taxes collection due to the illegal trades (here).

In the Covid-19 environment where government income is sharply lower and employment opportunity is scare, a case can be made that the government will finally crack down on the illegal trades in cigarettes. This will lead to higher income flowing to the government coffers and greater employment opportunities for Malaysians. Consequently, we can expect increased sales and profits for the legal cigarette manufacturers such as BAT further down the road.

Conclusion

Based on technical and fundamental consideration, I believe BAT is a good stock for medium to long-term investment.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.