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British American Tobacco (M) Bhd (June 9, RM50.34)
Upgrade to hold with an unchanged target price (TP) of RM50.47: British American Tobacco (M) Bhd’s (BAT) subsidiary BAT Malaysia Sdn Bhd and LGB Properties (M) Sdn Bhd have entered into a conditional sale and purchase agreement for a land parcel located in Virginia Park, Jalan Universiti, Petaling Jaya, Selangor. The proposed disposal was conducted by way of a public tender exercise that was closed on April 29. This is a follow-up to the announcement of the cessation of its factory operations in Malaysia on March 18.
The market value of the land parcel and buildings, as appraised by Messrs DTZ Nawawi Tie Leung Property Consultants on April 22, amounts to RM262.5 million. The purchase consideration amounted to RM218 million and was arrived at on the basis of “a willing buyer and willing seller”.
The disposal price equates to a sale price of RM382 per sq ft (psf). We believe the disposal is at the lower end of fair value given that our channel check indicates that transactions in the area are priced between RM300psf and RM500psf. Based on the disposal price, the expected net gain for BAT arising from the disposal is about RM148.8 million after taking into account the audited net book value of RM59.2 million, expenses incurred for the sale of RM2.2 million and a real property gains tax of RM7.8 million.
The disposal translates into an increase in financial year 2016 (FY16) earnings per share (EPS) of approximately 0.52 sen a share. This boosts our projected FY16 EPS of 264.83 sen by 19.7% to 316.9 sen. Management will review and determine by year end how to utilise the proceeds. If we assume that the full net gain of RM148 million is paid out as dividends, this will equate to 52 sen per share, boosting our forecast dividend payout by 20% to RM3.04 per share from RM2.52 a share.
This will enhance its dividend yield to 6% from 5%. We maintain our forecast as the disposal of the factory is merely the start of the structural evolution of BAT. The gain on disposal is a one-off gain. We are more keen on the potential cost savings and effects on margins as a result of this structural shift, which is not reflected in this announcement.
Risks to the stock stem from exceptionally high rates of illicit cigarettes in the market, and regulatory risks such as excise duty hikes and potential plain packaging laws. Furthermore, the advent of vape products has also taken a market share from traditional tobacco.
Positives for BAT include it being a high-dividend yield stock, its countercyclical share price pattern and being in an oligopoly industry, and its resilient earnings and low capital expenditure requirements. Negatives are it being in a highly regulated industry, a potential excise duty hike, a high level of illicit cigarettes in the market, and that its prices have already reflected its fundamentals.
We upgrade BAT to a “hold” from a “sell” given the recent share price movement. We maintain our TP at RM50.47. — Hong Leong Investment Bank Research, June 9
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This article first appeared in The Edge Financial Daily, on June 10, 2016. Subscribe to The Edge Financial Daily here.
