PETALING JAYA: The Control of Smoking Products for Public Health Bill 2023 is a key factor to watch out for in British American Tobacco (M) Bhd
’s (BAT) earnings growth in the near term.
Hong Leong Investment Bank (HLIB) Research said for the second quarter of 2023 (2Q23), BAT’s core profit after tax (PAT) of RM48.8mil brought the first half of 2023’s sum to RM89.5mil.
The figures were below HLIB’s and consensus’ full-year forecast estimates of 35% and 36% respectively.
“The negative deviation was mainly due to lower-than-expected cigarette sales amid the increase in illicit market share (mainly in 1Q23) and the growing usage of vape products.”
HLIB Research said the rebound of legal industry combustible volume, supported by a 2.3 percentage points (ppts) decrease in illicit market share, increased BAT’s revenue by 6.4% year-on–year (y-o-y).
Nevertheless, the decline in core PAT y-o-y was due to higher tax rate and operating cost.
“It is worth noting that BAT recorded a tax rate of 29.7%, exceeding the 29% achieved during the prosperity tax period last year, mainly due to non-deductible expenses,” the research house said.
On a quarter-on-quarter (q-o-q) basis, the rebound of legal industry combustible volume amid lower illicit market share led to a surge in BAT’s sales volume by 69.5%.
For 2Q23, the illicit market share was at 55.3% compared with 57.2% in 1Q23.
“Tracking this, revenue recorded a 73.8% jump with gross profit margin expanding by 3.3 ppts.
“Overall market share, however, declined by 0.5% to 51%. The premium and value-for-money segments share of market declined by 0.3% and 0.2% to 32.9% and 11.4%, respectively, while the aspirational premium segment held flat at 6.7% share of market,” HLIB Research said.
Higher tax rate and operating expenses resulted in BAT’s core PAT increasing by a smaller quantum of 19.8% q-o-q.
Operating expenses, in particular, increased by RM73mil or 252% due to the launch of the group’s tobacco heating product and to prepare for its upcoming vapour launch.
Going forward, the research house said BAT’s outlook remains uncertain, given the further delay in the Bill’s passage to the next parliamentary session, which is scheduled in October.
“We maintain our view that BAT will not launch its vape products (Vuse) until a clear and comprehensive regulatory framework is in place for the entire vape and e-cigarette industry.
“This delay in launching their vape products could have a negative impact on BAT, especially since there are currently no regulations governing the sale of nicotine vape products, making vape accessible to anyone, including minors under the age of 18,” the research house said.
As such, it added that the market share of traditional cigarettes is expected to gradually erode with the increasing availability of e-cigarette products, which will in turn affect BAT’s sales.
“Additionally, the prolonged delay in passing the Bill could position BAT as a late entrant in the vape space, hindering Vuse from making significant inroads into the Malaysian market, given the extensive range of existing vape products available now,” HLIB said.
HLIB has maintained a “hold” call for BAT with a lower target price of RM9.22 and trimmed its financial year 2023 (FY23), FY24, and FY25 core PAT forecast by 21%, 18.1%, and 15.4% respectively to account for the lower-than-expected sales volume.
