The Bank of Russia unexpectedly maintained its key interest rate at a record-high 21% , defying analysts’ expectations of another significant hike as inflation remains stubbornly elevated. The decision marks a shift toward a more measured approach in balancing economic growth and price stability. Key Details Inflation Concerns: Annual inflation climbed to 8.9% in November, well above the central bank’s 4% target , with inflation expectations reaching 13.9% in December. Policy Rationale: The central bank cited the significant tightening of monetary conditions after October’s 200-basis point hike as sufficient to resume disinflationary processes. Governor Elvira Nabiullina emphasized avoiding both economic overheating and severe slowdowns. Economic Overheating: Elevated government spending on the war in Ukraine and social programs, coupled with labor shortages and rising wages, have fueled strong domestic demand, exacerbating price pressures...
Maintain Hold with unchanged target price (TP) of RM55
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Strategic decision
The cessation of BAT’s domestic manufacturing activity is a strategic decision to achieve a more sustainable business model. We estimate that the disposal of its factory land and M&E could fetch about MYR1.45/shr, partially offsetting one-off staff costs, which raises the prospect of a special dividend. Retain HOLD for now with an unchanged MYR55 DCF-TP.
To cease manufacturing activity
BAT has announced that it will cease its factory operations in Malaysia in stages and that the wind down will be completed by 2H17. Management cites higher production costs on lower legal volumes due to the high excise environment and rise in illicits. What is also the case, in our view, is that it is probably cheaper now, under AFTA, to source from other ASEAN countries, which is why BAT plans to source its tobacco products from other BAT factories regionally.
Disposal of manufacturing facility
The factory land in Sekysen 36, Bandar Petaling Jaya will be disposed by May 2016 by way of a public tender exercise. Assuming an average price of MYR353/sq ft (avg transacted prices from 2005-2013 in the vicinity), the land itself (c.47k sq m) could be worth about MYR175m or 61sen/shr. The BV was MYR57.5m end-2014. The machinery and equipment (M&E) will be sold to related parties under the BAT group. BV was MYR240.8m or 84sen/shr. Total proceeds could amount to MYR415m or MYR1.45/shr.
Maintaining forecasts for now
The manufacturing ops, by its own, could be just marginally profitable, which prompted this recent move, we think. Over the longer term, BAT is likely to see cost savings on lower admin expenses. Pending further clarity from management, our back of the envelope computation suggests that the savings could add up to 8-9% to net profit p.a.. In the near term, the group will have to contend with closure and redundancy costs (230 employees will be affected by the factory closure, out of total 845 end-2014). Our forecast are unchanged for now, as is our HOLD call and DCF-TP of MYR55.00 (WACC: 7.1%, LT-growth: 1.5%).
Source: Maybank IB Research, 18 March 2016
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