CGS-CIMB Research has remained steadfast with its bleak outlook for British American Tobacco (M) Bhd as Health Minister Khairy Jamaluddin gears up to table the Tobacco and Smoking Control Act which culminates in the “generation end game” vision during the July 18-Aug 4 Parliamentary seating.
Reiterating its stance that the “generation end game” policy is likely to further galvanise the black market rather than curb smoking habits among Malaysians, the research house has retained its “reduce” call on Bursa Malaysia’s sole cigarette manufacturer with an unchanged dividend discount model (DDM)-based target price of RM8.77.
To re-cap, the proposed act includes a controversial clause that bans people born after 2005 from buying and smoking cigarettes and vapes. Yesterday (July 14), Khairy said the Cabinet has consented him to present the new tobacco bill in Parliament at its forthcoming session.
“The losers from the generation end game, in our view, would be BAT Malaysia, Malaysian smokers and the Government,” analyst Kamarul Anwar pointed out in a company update.
“On both the fundamentals and ESG (environmental, social and governance) points, we believe the ban would take the shine off BAT Malaysia’s investment proposition. The potential upside risk id for the Finance Ministry to reduce the excise duty rate on vape gels and liquids.”
CGS-CIMB Research admitted that it had initially thought that the proposed Tobacco and Smoking Control bill would be a lifeline for BAT Malaysia but coming to terms that it now poses a potential threat to the group.
The proposed bill also covers regulations on vaporiser products and electronic cigarettes which is positive but we fear the Finance Ministry’s ruling of a RM1.20/ml excise duty on vape gels and liquids could impede BAT Malaysia’s plan to diversify its product portfolio.
According to the research house, the excise duty would more than double the prices of some vape gels and liquids on the grey market based on its channel checks and conversations with vape traders.
“When the Government raised the excise duty on cigarettes in 2010-2016, an unintended consequence was that illicit cigarette market share rose to over 60% as most Malaysian smokers were no longer able to afford cigarettes from licensed manufacturers and trading companies,” cautioned CGS-CIMB Research.
CGS-CIMB Research said its FY2022-2024F forecasts have somewhat incorporated the potential corollaries from the Tobacco and Smoking Control Act but it has yet to assume sales forecasts from BAT Malaysia’s vapes because the group has not provided information on the product and pricing structure.
“Plus, we have our doubts that BAT Malaysia’s products can take off immediately – especially if existing vape players on the grey market refuse to play ball by raising prices to factor in the excise duty,” reckoned the research house.
“Our DDM valuation’s long-term growth rate is set to zero as the ‘generation end game’ policy could exhaust BAT Malaysia’s customer base in the long run.”
At 11.01am, BAT Malaysia was down 6 sen or 0.56% to RM10.72 with 24,400 shares traded, thus valuing the company at RM3.06 bil. – July 15, 2022
