BRITISH American Tobacco (M) Bhd (BAT) is facing tough times ahead, as it loses market share to the “stubbornly high” illicit trade of cigarettes.
Illegal cigarette trade remains rife at an elevated 69% of market share, which includes illegal vaping, according to Affin Hwang Capital analyst Chow Wei Nien, who noted that there had been ongoing engagement with the relevant authorities after the movement control order (MCO).
“The authorities were said to be generally receptive towards seeking an effective solution to address the issue. That said, unless more radical enforcement is taken, we believe the illicit market is unlikely to abate sizably over the near term,” said Chow.
As the illicit trade chips away at market share, BAT sees a decline in volume in its sales as well, with a sharp drop in 1QFY20 of 21% year-on-year (y-o-y) against the industry’s decline of 11% y-o-y.
“This potentially suggests an increasingly competitive landscape, especially from the other major tobacco players, Japan Tobacco International and Philip Morris International, likely owing to more effective marketing strategies and better brand appeal,” said Chow.
BAT’s margins are also likely to be further pressured in the future, as the skew towards value-for-money (VFM) at the expense of the premium brands will likely gain momentum, given the increasing strain in affordability. Chow believes the lower margin VFM mix will likely pressure the group’s margins further.
Affin Hwang maintains a sell call on BAT, citing a doubt of sizable recovery in legal tobacco volume given the unyielding illicit tobacco trade. The target price was also lowered to RM9.20 from a previous RM10.
At 12pm, BAT’s shares were last done at RM10.64, up 2 sen, with 237,300 shares traded. – July 3, 2020
