KUALA LUMPUR (July 25): CGS International has maintained its “add” rating on British American Tobacco (Malaysia) Bhd (KL:BAT) at RM8.37, with an unchanged Gordon Growth Model (GGM)-based target price of RM9.77.

In a note on Wednesday (July 24), the research house said at 10.6x FY2026F (financial year 2026 forecast) P/E (price-to-earnings ratio), BAT’s valuations are undemanding, supported by FY2024F-FY2026F yields of 8%-9%.

Commenting on the company, CGS International said BAT’s 2QFY2024 core net profit of RM36.2 million led to 1HFY2024 core net profit coming in below house/Bloomberg consensus’ estimates at 35%/39%.

“Improved economic activity and migration away from combustible products will help support BAT’s earnings decline throughout FY2024F.

“We see key drivers of consumer sentiment and spending over the next six-nine months from: i) flexible EPF Account 3 withdrawals, ii) monthly cash handouts to lower income households, and iii) higher civil servant salaries by at least 13% in 2025.

“All three measures, in our view, should support demand for BAT’s products, especially its vapour products,” the research house said.

CGS International maintained its thesis that BAT’s core earnings should bottom in FY2024F, before turning around in FY2025F and FY2026F, as its investments in its vape product, Vuse, lead to growth in sales and market share.

“Downside risks: increase in operating costs and continued decline in sales,” it said.

At the time of writing on Thursday, BAT added 0.12% or one sen to RM8.38, with 60,200 shares traded.

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