TA Securities Holdings Bhd forecasts a challenging outlook for cigarette players in 2020 due to a slim probability of a major turnaround for the legal cigarette market.
It said this is because enforcement by customs and the police could be undermined by the illegal cigarette syndicates which are rapidly evolving their tactics and operations.
“Even if the enforcement begins to gain greater traction, the option of going towards vapes appeared to be more compelling in the eyes of an average consumer,” the research house said in a note on Jan 15.
Moreover, the newly-launched tobacco heating product is still in its gestation period where there is a need to build its user base prior to monetising the product, said the research house.
“Note that Glo devices are being sold as cheaply as RM50 on Malaysian e-commerce platforms which we think are partly subsidised by British American Tobacco (Malaysia) Bhd (BAT) as part of its marketing investments.
“Furthermore, BAT’s planned downsizing activities may incur lumpy compensation which would increase operating expenses in FY20,” it said.
The research house further noted that privatisation may happen in the future but not at any price above RM15/share.
It said this is due to lack of incentives for the holding company to take BAT private.
“Essentially, we believe privatisation of public companies is more likely to occur when a company is pursuing a new goal, which requires substantial market repositioning, the industry is growing, or companies’ assets are being heavily undervalued by the public.
“In the case of BAT, we do not see it as a strong fit to the aforementioned conditions for privatisation,” it said.
Meanwhile, BAT’s outlook remains challenging and bleak amidst shrinking legal cigarette market size, higher marketing expenses and downsizing activities, said the research house.
“Therefore, we lowered our target price to RM11.90 and downgraded BAT to sell as we think few investors would have an appetite for a company that is undergoing earnings erosion.”
BAT closed 1.33% lower at RM14.86 on Jan 15, giving it a market capitalisation of RM4.24 bil. – Jan 15, 2020
