THRIVING illicit market demand is not the primary contributing factor to British American Tobacco (M) Bhd’s (BAT Malaysia) dwindling sales and margins but rather inflation-induced affordability issue that is plaguing the tobacco industry.
CGS-CIMB Research, which derived such observation, argued that BAT Malaysia’s sales only recovered during the movement control order (MCO) at the height of the COVID-19 pandemic because a large segment of smokers had larger disposable incomes after their social activities were curtailed.
“Now, they will have less money for legal cigarettes after spending on petrol, eating out, and other commitments,” justified analyst Kamarul Anwar in a results review of Bursa Malaysia’s only cigarette manufacturer. “The MCO in 2020-10M 2021 had helped to shore up the group’s topline.”
According to CGS-CIMB Research, BAT Malaysia’s 1Q 2022 core net profit dropped by 18% year-on-year (yoy) and 27.6% quarter-on-quarter (qoq) on the back of dwindling sales and margins.
“The group said the Omicron variant’s emergence had hurt its 1Q 2022 sales. We are of the view that this is unlikely to be the key reason,” opined the research house.
The latest development has promoted CGS-CIMB Research to reiterate its “reduce” rating on BAT Malaysia with a dividend discount model (DDM)-based target price slash to RM8.77 (from RM10.53 previously).
“We cut our FY2022F earnings per share (EPS) by 5% after adding the prosperity tax’s (cukai makmur) impact,” noted the research house.
“In our view, Malaysia’s regulatory framework is working against the tobacco industry’s efforts to grow its sales. The upside risks will be for the Government to rescind its generation end game proposal for cigarette sales and tones down the vape liquid excise duty.”
Like CGS-CIMB Research, Hong Leong Investment Bank (HLIB) Research, too, is concerned over the effect of over-regulation that could potentially fuel illicit cigarette sales as affected consumers will turn to the black market instead.
“The Tobacco and Smoking Control Bill is currently being finalised and is expected to be tabled in Parliament in July by Health Minister Khairy Jamaluddin. The intention of the bill is to restrict the sale of cigarettes to individuals born after the year 2005,” observed the research house.
“We note that the Health Ministry is also currently studying the viability of implementing a tobacco product display ban to end the smoking habit.”
Against such backdrop, HLIB Research has retained its “hold” call on BAT Malaysia but lowered its DCF (discounted cash flow)-derived target price to RM12.04 (from RM12.14 previously).
At 10:51am, BAT Malaysia was down 48 sen or 3.76% to RM12.30 with 236,500 shares traded, thus valuing the company at RM3.51 bil. – May 30, 2022
