WHILE British American Tobacco Malaysia Bhd (BAT Malaysia) is confident that it could register healthy sales growth in FY2021, it is well aware that the affordability issue among smokers would again rear its ugly head eventually.
In this regard, the ultimate solution will be for the Government to listen to the grouses of tobacco players by finding ways to address the yawning gap between legal and illegal cigarette retail prices.
If the tobacco lobby does win its case, this could be a game-changer for BAT Malaysia which is the only listed cigarette manufacturer on Bursa Malaysia today.
“Removing the niceties and doublespeak, what BAT Malaysia posited was basically that the Government cut legal cigarettes’ retail prices so that they would be on par with their illicit counterparts,” analyst Kamarul Anwar pointed out in a company update.
“Certainly, we do not know if a cigarette price cut is in the offing, but what is certain, if that happens, the Government will face a backlash from anti-smoking non-profit entities.”
Pragmatically speaking, CGS-CIMB Research is of the view that there is no way to stop smokers from lighting up.
“Raising excise duties has only allowed the illicit trade to outsize that of the legal players combined,” noted the research house.
“At the very least, making cigarettes more affordable would arrest demand for bootleg cigarettes.”
Moreover, the research house observed that Malaysian cigarettes are among the most expensive relative to the population’s income compared with other countries based on its cigarette price-to-minimum wage ratio.
The market share of illicit cigarettes in 4Q CY2020 has remained at a high of 64.4% mainly due to consumer affordability factor.
Henceforth, it makes sense that a significant decline in illicit cigarettes can only materialise if the large price gap between legal and illicit cigarettes is addressed.
That said, BAT is cautiously optimistic that stricter transshipment regulations will facilitate a reduction of illicit cigarettes in its FY2021 given circa 40% of illicit cigarettes enter the country through transshipment channels.
All-in, CGS-CIMB Research maintained its “add” rating on BAT Malaysia with an unchanged dividend discount model (DDM)-based target price of RM18.23.
“A reduction in tobacco excise duty will most likely lead to a re-rating, in our view,” justified the research house. “Another catalyst, however, is almost in the bag: vapes’ upcoming regulation whereby the group can tap into the product’s growing popularity.”
At 11.23am, BAT Malaysia was up 2 sen or 0.15% to RM13.38 with 54,500 shares traded, thus valuing the company at RM3.82 bil. – Feb 19, 2021
