DESPITE its net earnings having slumped 30% to RM87.85 mil for the 1H FY2023 period (1H FY2022: RM125,54 mil), UOB Kay Hian Research has reiterated its “buy” rating on British American Tobacco (M) Bhd with a target price of RM14.40 on expectation of the tobacco giant gaining a significant foothold in the nicotine vaping segment.
Despite only accounting for 36% both of its and consensus’ earnings forecasts respectively, the research house deemed BAT Malaysia’s latest results to be within expectations on the back of its sterling track record in other key markets.
“We expect the frontloaded commercial spend related to an eventual launch of its vape products and a high effective tax rate (2Q FY2023: 30%) to sharply moderate over the rest of 2H FY2023,” opined analyst Philip Wong in a results review.
“On top of the legal tobacco industry stabilising, BAT Malaysia should be catalysed by the nicotine regulation.”
Had it not been for these two frontloaded developments, UOB Kay HIan Research projected that BAT Malaysia’s earnings could have accounted for 48% of full-year earnings estimates. An interim dividend per share (DPS) of 16 sen was declared, bringing the cigarette manufacturer’s 1H 2023 DPS to 29 sen (1H FY2022: 42 sen).
Moving forward, BAT Malaysia had reiterated previously that it could roll out its nicotine vaping line-up, Vuse, within a few months of nicotine vaping being legalised in Malaysia. It also expects to eventually achieve market leadership in the segment.
“This is not too far-fetched as BAT’s nicotine vaping brand, Vuse, averaged 35.9% market share in the vapour category across global key markets in 2022. We have factored in nicotine vaping contributing 3%-10% of overall existing volume throughout the forecasted years of 2023-2025,” noted UOB Kay Hian Research.
The research house further expects minimal potential impact should the Generation End Game (GEG) policy be implemented.
“The government looks to implement generation end-game (GEG) to smoking by effectively banning those born in 2007 and onwards from smoking. (But) we believe there is minimal immediate impact on BAT given that those aged 18 to 21 account for less than 5% of volume sales,” observed the research house.
Earlier, BAT Malaysia’s managing director Nedal Salem has described the company’s financial results “to be within expectations given the tough economic climate”.
“However, we expect this impact to be short-term as we continue progressing into a multi-category organisation, backed by our trajectory in the new category segment,” he pointed out in a media statement yesterday (July 24).
“To this end, the group aims to continue growing its tobacco heating product, glo, while preparing for the launch of Vuse, our vapour product which is currently the number one global vaping brand.”
Elsewhere, Salem also expressed concern about the tobacco black market which continues to impact the industry.
“We will continue working with the relevant authorities to bring down the incidence of black-market cigarettes which stubbornly hovers above 55%,” he lamented.
“The group hopes that the 2024 Budget tabling will continue to see current measures like tightening controls on the importation of cigarettes, enhancing controls along the Malaysian coastline and at landing points including private jetties and the continued implementation of a special rewards scheme for enforcement agencies be maintained.”
At the close of today’s mid-day trading, BAT Malaysia was down 2 sen or 0.19% to RM10.28 with 241,000 shares traded, thus valuing the company at RM2.93 bil. – July 25, 2023
