Mixed outlook for bruised and battered BAT Malaysia

WHO in the right frame of mind dared to imagine that British American Tobacco (M) Bhd which during its heydays climbed to probably a record high of RM73.36 on 12 September 2014, would now be trading at a sub-RM10 level today?

Well, the fall from grace over a span of six years is nothing surprising to seasoned investors who must have witnessed various blue chip counters nosedived to penny stock level during their life span.

MIDF Research foresees that growth prospects of BAT Malaysia will continue to be hindered by illicit products which have adversely affected the legal tobacco market.

“Although the group has launched the ‘Stop the Black Market’ campaign earlier in 3Q to raise awareness, it requires more holistic measures by other stakeholders to improve the situation,” analyst Ng Bei Shan pointed out in a results review.

BAT Malaysia saw its net profit for its nine-month FY2020 dwindled 31.8% to RM169.12 mil (9M FY2019: RM248 mil) while that of its 3Q FY2020 contracted 23.3% to RM63.74 mil (3Q FY2019: RM83.13 mil).

However, its revenue during the third quarter notched up 7.4% to RM627.52 mil from RM584.34 mil during the same period a year ago.

Elsewhere, shareholders may be disappointed that the company declared a third interim dividend of 21 sen/share (vs 29 sen/share in 3Q FY2019) which brings its year-to-date total dividend to 56 share (vs 85 sen/share in 9M FY2019).

All-in, MIDF Research has downgraded BAT Malaysia to “neutral” from “buy” previously with a lower target price of RM9.60 (from RM14.90 previously).

“We believe that it will take time and a lot of coordinated efforts from various stakeholders to make a change in the industry,” projected Ng. “That said, BAT Malaysia’s dividend yield is still attractive at 7.7% and we believe its restructuring exercises may bear fruit in the long-term.”

Sharing a similar sentiment, TA Securities Research opined that while data collected through various market researchers could accelerate discussions and enforcements on illicit cigarette trade, it doubts that the government would resort to implementing an excise moratorium.

The “Stop the Black Market” campaign entails BAT Malaysia calling for holistic approaches to curb illicit trades with measures include (i) operationalising multi-agency task force, ii) stronger enforcement at borders; (iii) reviewing excise structure/moratorium; and (v) regulating vaping.

“Nevertheless, we believe probabilities of hiking cigarette excise duties are low in 2021 given that the tobacco industry has been weakened by the COVID-19 pandemic,” projected analyst Jeff Lye Zhen Xiong.

TA Securities Research maintained its “buy” rating on BAT Malaysia with an unchanged target price of RM12.50 premised on its consecutive quarterly recovery alongside the company’s commitment to stick to its dividend policy despite current hardship.

At 9.20am, BAT Malaysia was traded up 17 sen or 1.71% at RM10.12 with 136,300 shares traded, thus giving the company a market capitalisation of RM2.89 bil.

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