British American Tobacco’s (BAT) earnings should bottom in FY24F. BAT’s investments in and launching of its own vape brand, Vuse, in 3Q23 should help its earnings turnaround from FY25F onwards. Valuations are seen to be undemanding, supported by FY24-26F yields of 8-9%.
CGS International’s (CGS) Company Note today (May 7) said they resumed coverage on BAT with an Add rating and a lower TP of RM9.77.
FY24F earnings to bottom despite downtrading and shift to vaping
Despite consumer downtrading and migration towards the growing vapour market, which has led to an overall sales volume decline in the legal combustible industry in Malaysia, CGS sees BAT’s earnings bottoming in FY24F as they expect its value-for-money (VFM) products, such as Rothmans and Luckies, and vape brand Vuse, to gain market share.
CGS forecasts a slight 1.0% yoy decline in FY24F core net profit, followed by a turnaround to grow 9.8% and 5.2% in FY25F and FY26F, respectively, causing ROE to widen from a low of 51.1% in FY24F to 57.1% in FY26F.
Vuse expansion to drive FY25-26F earnings turnaround and growth
Having launched vapour products under its Vuse brand in 3Q23 and invested in marketing and ad campaigns to promote and expand its outreach, BAT guided that it intends to continue investing in Vuse to grow its brand awareness and market share.
CGS believes this could contribute to net profit staying flat for FY24F as operating and marketing costs stay elevated.
However, they think that, as its sales and market share grow, cost per vape product is likely to decline, which should result in core net profit turning around and growing 9.8% in FY25F and 5.2% in FY26F.
Upgrade to Add on undemanding valuations supported by yields
CGS upgraded BAT from Hold to Add, with a lower TP of RM9.77 to better capture its medium-term recovery in profitability.
