BAT Malaysia’s performance turnaround impeded by record tobacco black market

ALTHOUGH it was able to outperform the legal industry with a growth of 3% over the previous quarter for its 4Q FY2020, British American Tobacco (M) Bhd (BAT Malaysia) lamented that the tobacco black market has continued to undermine the company’s financial performance.

For 2021, the company expects the levels of black market cigarettes in Malaysia to remain high considering many B40 and M40 consumers will be facing financial pressure stemming from the prolonged movement control order (MCO 2.0).

As such, BAT Malaysia is wary that both market segments may turn to cheaper black market alternatives simply because they cannot afford legal cigarettes.  

“The Government has made a good start in addressing the tobacco black market in Budget 2021,” opined BAT Malaysia’s managing director Jonathan Reed.

“There is now an urgent need to close the price gap between legal and black market products. Only then can the illegal cigarettes problem be addressed effectively and tax losses be stemmed.”

Reed further reiterated the critical need for the Malaysian Government to introduce regulatory and excise frameworks for nicotine vaping.

“This would ensure that the one million Malaysian vapers can access products of known quality, allow the Government to collect significant revenue and is part of our global purpose of creating A Better Tomorrow by reducing the health impact of our business,” he pointed out.

For its FY2020, BAT Malaysia posted a profit from operations of RM346 mil which is a 28% decline from RM478 mil in its FY2019.

This decline can be attributed to legal market contraction as a result of high illicit cigarette volume, growth of illicit vaping, market down-trading and lower duty-free sales, according to BAT Malaysia.

However, the decline was partially offset by the benefit of cost rationalisation that the group has undertaken since end-2019.

“Dunhill, the company’s flagship brand, gained share of segment with an increase of 2.0 percentage-points (ppt) year-on-year,” the company noted.

“The launch of KYO was also able to capture a fair share of down traders, leading to an increase in our overall market share by 1.1ppt to 51.7%. “

On a more positive note, Reed said BAT Malaysia had been resilient in its FY2020 with strong signs of improved quarter on quarter performance.

“Based on our fourth quarter results, we successfully delivered three consecutive quarters of growth in profit from operations,” he commented.

“Notably, BAT Malaysia was able to outperform the legal industry with a growth of 3% over the previous quarter.”

This was mainly due to the market leadership of Dunhill coupled with the strong performance of its value-for-money brands Rothmans and KYO. The improved performance was able to offset the impact of COVID-19 travel restrictions on the company’s duty-free business.

According to Reed, BAT Malaysia’s success in growing its market share within the legal space saw profit from operations during its 4Q FY2020 increase by 19% to RM104 mil.

“This improvement came off the back of a 5% jump in revenue to RM660 mil compared to the third quarter,” he added.

At the close of today’s trading, BAT Malaysia was up 2 sen or 0.15% to RM13.16 with 91,300 shares traded, thus valuing the company at RM3.75 bil. – Feb 10, 2021

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