Thursday, July 7, 2011

RAM Ratings reaffirms BAT Malaysia's AAA/P1 ratings

KUALA LUMPUR: RAM Ratings has reaffirmed the AAA/P1 ratings of British American Tobacco (Malaysia) Bhd's RM100 million Commercial Papers/Medium-Term Notes Programme (2007/2014).

It also reaffirmed the AAA rating of BAT's RM700 million Medium-Term Notes Programme (2007/2020) has also been reaffirmed.

Both the long-term ratings have a stable outlook.

In a statement Thursday, July 7, RAM Ratings said BAT's credit profile was supported by its entrenched market position and superior financial profile.

Although its share of domestic sales contracted 0.6 percentage points year-on-year in 2010, the group remained the clear leader with a 59.7%-share of the market, it said.

'Its flagship Dunhill remained the most popular local premium brand last year, with a 65.6%-share (2009: 64.8%) of this segment.

'The group also garnered a significant 33.5%-share of the value-for-money segment (2009: 33.7%). Despite the challenging landscape of the tobacco industry, BAT's adjusted funds from operations and operating cashflow debt cover ratios stayed superior at above 1 time as at end-December 2010,' it said.

RAM Ratings said that offsetting the above strengths were the increasingly difficult operating environment and regulatory risks of the local tobacco industry.

The industry's sales volumes are still vulnerable to excise-duty hikes and the proliferation of illicit cigarettes, it said.

Industry sales volumes declined for the seventh consecutive year in 2010, following a steep 16% spike in excise duty last October, it said.

'While the incidence of illicit cigarettes had reduced slightly from its peak of 37.5% in 2009 to 36.3% in 2010, they still accounted for a significant portion of local tobacco consumption.

'Despite the minimum pricing imposed on cigarettes last year, we understand that certain manufacturers of extremely-low-priced cigarettes have been selling their output below floor prices, in a bid to gain market share,' it said.

The rating agency said that should this persist, the sales volumes of the 3 major domestic tobacco manufacturers ' BAT, JT International Berhad and Phillip Morris Sdn Bhd ' may be affected.

At the same time, BAT Malaysia's margins are expected to be squeezed by a full year's effect from the withdrawal of 14-stick packs (which yield higher margins than 20-stick packs), it said.

Nonetheless, the group's profitability is viewed to remain commendable relative to its AAA-rated peers.

RAM Ratings' Head of Consumer & Industrial Ratings Kevin Lim said that looking ahead, RAM Ratings expects BAT's cashflow-protection measures to stay superior, supported by its well-established market position and strong brand equity.

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