Analysts Upbeat on BAT's 90% Dividend Payout

Source from:  The Star 07/27/2009

Although the tightening regulation and possible tax hike for cigarettes in the 2010 Budget are expected to exert further pressure on British American Tobacco (M) Bhd (BAT) in the coming quarters, analysts are upbeat on its 90% high dividend payout for the current financial year. Insider Asia said a probable hike in government tax, rising illicit trade and weaker economic conditions were likely to cap volume sales growth prospects for the industry, going forward. The brokerage said government tax on cigarettes had been rising steadily on an annual basis in attempts to stamp out the smoking habit, especially among youths. The industry also had to contend with increasingly stringent regulations, such as the ban on sale of small cigarette packs, mandatory pictorial health warnings on the pack and expansion of non-smoking zones. "This trend is not likely to reverse in the foreseeable future. The best the industry can hope for is a more moderate tax hike, usually announced during Budget day," Insider Asia said in a research note. With cigarette prices having risen every year for the past five years, and likely to go higher, illicit trade would continue to flourish, it said. "On a positive note, BAT remains a fairly low-risk investment for yields. "The industry is matured. Hence, cigarette companies can afford to pay out most of their cash flow as dividends in the absence of major capital expenditure requirements," it said. Insider Asia estimated BAT's net profit to drop 4.1% to RM778.5mil in 2009 but the company was likely to maintain a high dividend payout ratio, supported by its relatively steady cash flow from operations. AmResearch Sdn Bhd said underlying the tobacco industry operating environment were challenges such as risk of an excise duty hike under Budget 2010 and possible minimum pricing of RM6 per pack by end-2009. Other challenges included the eventual phasing out of 14-stick pack in 2010, the alarming growth of illicit trades and the level of exceptional low-priced cigarettes (ELPCs), it said. The average selling price for ELPCs is RM4.50 to RM5.50 per pack currently. However, the brokerage expects a total dividend per share (DPS) of RM2.66 in the financial year ending Dec 31 (FY09), premised on similar dividend payout of 93% in FY08. Among the research houses, 16 had a "hold" call on BAT while four rated "buy" and five "sell". The stock closed 25 sen, or 0.6% higher, at RM45 yesterday. Meanwhile, Kenanga Research said prospects for the tobacco industry remained unexciting in spite of import duties on tobacco and tobacco products being slashed to 5% from Jan 1 under the Asean Free Trade Area agreement. The import duties for this segment currently range from 10% to 100%. Kenanga said the market, being opened to foreign competitors, would have little impact on BAT's leaf costs in 2010 due to its support to the local leaf industry. The brokerage said BAT was on track to paying out Kenanga's estimated FY09 DPS of RM2.65 that would translate into a dividend yield of 5.9%. "We have forecast FY09 net profit to grow 1.2% based on a 5.3% decline in BAT's sales volumes and 4.5% decrease in total industry volume," it said. HwangDBS Vickers Sdn Bhd maintained its forecast earnings on BAT and expects a minimum 90% dividend payout for FY09 to FY11. "This implies prospective net yields of 5.7% to 5.9%," it said. Enditem