Broker: UOB Kay Hian
Date of Report: 29 July 2025

British American Tobacco Malaysia: Upgraded to Buy on 1H25 Outperformance and Margin Expansion

Company Overview: British American Tobacco Malaysia (BAT)

British American Tobacco Malaysia (BAT) is a leading cigarette manufacturer, marketing renowned brands such as Dunhill, Peter Stuyvesant, and Rothmans. The company has recently reported a stellar first half of 2025, prompting an upgrade to a BUY recommendation with a higher target price, despite ongoing sector headwinds.

Key Stock Data and Performance

• Sector: Consumer Staples
• Bloomberg Ticker: ROTH MK
• Shares Issued: 285.5 million
• Market Cap: RM1,304.9 million (US\$308.4 million)
• 52-week High/Low: RM8.36 / RM4.18
• Major Shareholders:
  • British American Tobacco PLC: 50.0%
  • Tan Yu Yeh: 3.1%
  • Allianz SE: 1.4%

Despite a volatile year, BAT’s share price has recently shown signs of recovery, offering a potential upside of 24.7% to the new target price of RM5.70.

1H25 Results: Above Expectations on Volume and Margin Upside

BAT’s first half of 2025 exceeded both internal and consensus expectations, driven by a remarkable second quarter. Key highlights include:

• 1H25 Core Net Profit: RM74 million (+12% YoY), accounting for over half of full-year forecasts.
• 2Q25 Revenue: RM625 million (+94% QoQ, -2.5% YoY)
• 2Q25 Net Profit: RM51 million (+118.9% QoQ, +40.4% YoY)
• Dividend: 12 sen declared for 2Q, bringing 1H25 payout to 19.5 sen (versus 22 sen in 1H24).

Improved Margins Driven by Reduced Vuse Marketing Spend

Revenue for 1H25 fell by 10% year-on-year to RM947 million as BAT experienced a 1.2ppt loss in overall market share. While Dunhill gained 0.3ppt in premium segment share, aspirational premium (AP) and value-for-money (VFM) brands declined by 0.4ppt and 0.9ppt, respectively. However, the cessation of marketing expenditure on its vapour brand, Vuse, following its exit from the segment in April, led to a 40.1% reduction in operating expenses and delivered a notable 1.5ppt expansion in net profit margin.

Sequential Rebound: Strong 2Q25 Drives Upgrades

The second quarter of 2025 was marked by a 7.8% rise in legal cigarette volumes. This was attributed to a 0.4ppt quarter-on-quarter drop in illicit incidence (to 54.4%) and a post-fasting month surge in consumer demand. While a 0.6ppt decline in market share slightly offset the gains, the quarter’s sequential improvement was broad-based.

Financial Snapshot and Forecasts

Stock Impact: Near-Term Sparks Amid Sunset Industry Outlook

Despite BAT’s operational improvements, the long-term outlook remains challenging due to persistent consumer headwinds and rising health consciousness. The exit from the Vuse vapour brand eliminates a key long-term growth catalyst. Nonetheless, the immediate benefit of reduced marketing spend has led to margin expansion.

BAT’s renewed focus on combustible cigarettes, coupled with the potential boost from the recently announced RM100 government cash handout (expected to support VFM and AP brands), is likely to sustain margin improvements into the second half of 2025.

Earnings Upgrades and Valuation

• 2025/2026/2027 earnings have been revised up by 15%/13%/10% due to higher margins and stronger sales volumes.
• Target price increased to RM5.70 (previously RM5.45), based on DCF methodology (WACC: 10.0%, terminal growth: -3.0%), implying a 12.9x 2025F PE, just below the five-year mean.
• At current valuations, BAT trades below -2.0 standard deviations from its historical average and offers an attractive dividend yield of approximately 12% through 2027.

Environmental, Social, and Governance (ESG) Initiatives

• Environmental:
  • Targeting carbon neutrality (Scopes 1 & 2) by end-2025.
  • Aiming to reduce waste by 15% and recycle at least 95% of waste by end-2025.
  • Committing to 100% reusable, recyclable, or compostable plastic packaging by end-2025.
• Social: Aspiring for 40% women in senior management by end-2025.
• Governance: Board gender diversity at a 7:3 male-to-female ratio, with board experience split as follows:
  • Three members with over five years’ tenure, one with three to five years, and three with less than three years.

Key Assumptions for 2025-2027

Conclusion: Trading Opportunity Amid Uncertainty

British American Tobacco Malaysia presents a compelling near-term opportunity for investors, buoyed by strong 1H25 results, margin expansion from cost discipline, and attractive dividend yields. While the broader tobacco sector faces long-term structural challenges, BAT’s operational improvements, focus on core brands, and currently depressed valuation offer attractive risk/reward dynamics for those seeking yield and potential upside in a challenged industry.

The report was prepared by Jack Lai Yuan Khai, UOB Kay Hian.