Sales growth for BAT could deter by VFM cigarettes
Sales growth for British American Tobacco Malaysia Bhd (BAT) may come to a halt dragged by value-for-money (VFM) cigarettes, cheaper and unregulated electronic cigarettes as well as vaporiser products. Pix by Omar Ahmad
KUALA LUMPUR: Sales growth for British American Tobacco Malaysia Bhd (BAT) may come to a halt dragged by value-for-money (VFM) cigarettes, cheaper and unregulated electronic cigarettes as well as vaporiser products.
CGS-CIMB Research analyst Kamarul Anwar said BAT is cognisant of the high pricing for legal cigarettes, especially since many Malaysians' incomes were strained due to the series of movement control orders (MCO) imposed since March 18, 2020.
"While the lockdown may have lured some lapsed smokers and caused people to light up more often, much of the sales growth came from margin-eroding VFM cigarettes," he said in a recent research note.
According to BAT, VFM lines' share of sales accounted for about 15 per cent in the first quarter (Q1) of 2021 and grew by between 3.0 per cent and 4.0 per cent per annum.
"Cheaper and unregulated electronic cigarettes and vaporiser products have also grown in popularity," he added.
Vapes' share of Malaysia's enlarged tobacco market rose from about 9.0 per cent in 2019 to 12 per cent currently, said BAT.
Nonetheless, CGS-CIMB Research said BAT began to see its sales climbing in March 2021, two months after the government banned cigarette transshipments.
"BAT's March 2021 monthly sales volume surged 36 per cent year-on-year (YoY) and 33 per cent month-on-month (MoM).
BAT added that cigarette transshipments had been blamed for providing a conduit for smuggling cigarettes.
BAT said illegal syndicates were shifting their smuggling channels from ports to smaller jetties.
"It is still too early to celebrate a win in the battle against the illicit trade. Still, the company expressed confidence that it can generate more quarterly YoY sales volume growth in the current financial year.
"BAT believes that some smokers have reverted to their former favourite legal brands," he said.
However, CGS-CIMB Research said the ball is in the government's court to reinforce the legal market, citing that BAT has appealed to the government to draft a vape regulation.
"BAT is at the mercy of the government to greenlight the sale of vapes and possibly narrow the price gap between combustible cigarettes and their bootleg counterparts.
"But there has not been much progress as the government has been tied up with fighting against Covid-19, and the parliament has been suspended since January 2021," he said.
BAT also said the government needed to address the pricing gap between legal and illegal cigarettes.
"We have heard various quarters urging the government to reverse excise duty hikes, particularly Australia-based Retail and Trade Brands Advocacy (RTBA) and the United Malays National Organisation's (UMNO) secretary-general Datuk Seri Ahmad Maslan."
The research firm said only time would tell if the government will make any changes since other countries have also seen a rise in illicit cigarette trade after raising cigarette prices.
CGS-CIMB Research has reiterated a 'Hold' for BAT with a target price of RM15.40 per share, despite a little capital appreciation potential left after about 24 per cent year-to-date rally,
"The stock offers FY21-23 yields of 5.9 per cent to 6.7 per cent. This justifies our hold recommendation," he added.
CGS-CIMB Research said BAT's downside risks include sales volumes plummeting again YoY and pressure on margins from more down trading.
The key upside risks include stronger-than-expected sales, speedy regulation of vapes, and possible amelioration of high cigarette excise duties.