BRITISH American Tobacco (Malaysia) Bhd’s (BAT) launch of a new and cheaper cigarette brand has been touted to be a positive move by market participants.
BAT’s latest, KYO, would help the group meet demand from consumers seeking cheaper alternatives, analysts said.
“The launch of KYO is timely, in our view, given the stretch in affordability and increased down-trading by consumers,” said Affin Hwang Capital analyst Chow Wei Nien.
The analyst noted that the brand’s retail price of RM11.50 represents a 34% and 8% discount to BAT’s existing premium and VFM brands, representing an extension of the group’s offerings into the VFM segment.
MIDF Research analyst Ng Bei Shan noted that BAT is pushing for a higher market share in the VFM segment, which grew 28% in the first half of 2020 compared to 21% in 2019, as consumers continue to downgrade.
“In view of the growing VFM segment, which was previously not the core of BAT, it is increasingly pushing for a higher market share in the segment. Among others, it has launched KYO on July 1, which is priced slightly more attractively than Rothmans,” said Ng.
TA Securities analyst Jeff Lye believes that the launch of KYO, with its lower retail price, is targeted to not only capture consumers looking for cheaper alternatives, but also to entice illegal cigarette smokers.
“KYO is the most affordable among BAT’s range of cigarette products, which we believe is targeted to capture down-trading from aspirational products and attract up-trading from illegal cigarette smokers,” said Lye.
The sentiment from analysts is also positive for the tobacco player’s results for the second quarter of its 2020 financial year ended June 30.
The analysts all noted that BAT has shown sequentially better numbers, having improved its revenue and core earnings by 13.6% and 9.6% to RM546.6 mil and RM60.7 mil respectively on a quarter-on-quarter (q-o-q) basis.
This, Affin Hwang’s Chow noted, is due to the overall industry volume growth of 10% q-o-q, attributed to increased spending during the Hari Raya festive season and higher disposable cash on hand.
Ng noted that the improved results could also be attributed to “the management’s agility in sales and distribution along the easing of the movement control order (MCO).”
“This has also resulted in share growth in convenience stores from 44.7% in 1QFY20 to 46.6% for the latest quarter,” said Ng, adding that consumers had shifted from general trade to convenience stores during the latest quarter as well.
Still, for a year-on-year (y-o-y) basis, analysts noted that BAT’s revenue for the first half of its 2020 financial year had declined 18.5% y-o-y, with sales volume affected by consumers down-trading towards cheaper alternatives, as well as lower duty-free sales as a consequence of travel restrictions during the MCO.
The analysts also addressed the industry-wide problem of illicit cigarettes, which maintain a volume share of about 70% as illicit products continue to flood the market, which has impacted the market share of the legal players.
“That said, the legal market seems to have stabilised, with an unchanged industry domestic shipment volume recorded compared to a year ago,” said MIDF Research’s Ng, adding that BAT has taken a proactive move in launching the “Stop the Black Market” campaign in creating awareness.
TA Securities’ Lye noted that the campaign, along with market research by Oxford Economics, may encourage more national discussions and enforcement on illicit cigarette trade.
“Correspondingly, we believe probabilities of hiking cigarette excise duties are low in 2021, given that the tobacco industry has been weakened by the Covid-19 pandemic, where a further hit from an excise duty hike may be detrimental to the business landscape,” added Lye.
TA Securities and MIDF Research both maintain buy calls on BAT, with an unchanged target price of RM12.50 and a revised target price of RM14.90 from a previous RM15.70 respectively.
However, Affin Hwang maintains its sell call, with a higher target price of RM9.50 from a previous RM9.20.
“While we are encouraged by the decent 2Q20 results, the strong increase in the legal industry volume q-o-q is likely a one-off, in our view, given that the illegal cigarette trade may have been partially restricted during the MCO.
“Thus, we are not fully convinced of a sustainable turnaround in the legal industry volume, with the illegal cigarette trade remaining stubbornly high and given a frail macro backdrop on lingering Covid-19 concerns,” said Chow.
At the end of the morning’s trading, BAT’s shares were last done at RM10.80, up 42 sen, with 774,100 shares traded. – July 24, 2020
