British American Tobacco - 2Q09: Sharp volume contraction

2Q09: Net profit of RM201.2m (1H09: RM407.2m) was in line with consensus and 51% of our full-year forecast. Gross profit fell 7.5% yoy and 6.8% qoq to RM377.0m, but net profit improved 3.1% yoy due to sharply lower operating costs (-22% yoy and -19.4% qoq), which we attribute partly to lower A&P expenses. Product mix improved as its Global Drive Brands’ (GDB) market share rose 3.1ppt to 54.7% in 1H09. An interim dividend of 113 sen/share (gross yield: 3.4%) was declared, similar to 2Q08’s.

BAT’s sales volume contracted 13.9% vs industry’s 11%, worse than our original projection of a 10% contraction, due to consumer down-trading and the initial kneejerk reaction to the implementation of pictorial health warnings in March. We maintain our forecast for sales volume to contract by 6.5% yoy in FY09 as 2H09’s volume decline should moderate as the economy picks up, although we acknowledge the potential downside to our forecast.

Much more moderate excise duty hike anticipated. Going forward, we think it is unlikely for the government to repeat the past two years’ hefty excise duty hike of 20-25% on cigarettes. Instead, the duty should be around 10-15% as the government may be compelled to limit the high incidence of illicit trade (which could potentially be higher than 30%). Currently, the excise duty is 18 sen/stick.