Illustration shows BAT (British American Tobacco)
KUALA LUMPUR: The vape market continues to chip away at the earnings of British American Tobacco (M) Bhd
, which yesterday posted a 23% second-quarter decline in its bottomline from the previous year.
In the second quarter ended June 30, 2024, BAT Malaysia recorded revenue of RM640.46mil, about 5.6% lower compared with RM678.12mil registered a year earlier. Its net profit shrank RM11.25mil from the same quarter in 2023 to RM36.28mil.
According to Hong Leong Investment Bank (HLIB) Research, the outlook for BAT Malaysia is negative as it has been unable to exert the same kind of dominance in the vape market it has traditionally enjoyed in the combustible tobacco market.
"Although the group introduced its Vuse brand in FY23, the sales void continues to widen due to the fragmented nature of the vape market," it said in a company update.
"Unlike the traditional combustible cigarette market, which is dominated by only three players in Malaysia, the vape market is highly fragmented with over 100 brands and more than 1,500 SKUs.
"The expansion of the vape market at the expense of traditional cigarette market share has led to a dispersion of sales among multiple vape brand owners, thereby putting pressure on BAT's sales performance."
BAT Malaysia's margins are also narrowing due to the ongoing down-trading and shifting impact to vape products.
HLIB highlighted the margin of vape products is similar to that of combustible cigarettes in the VFM segment, which is perceived to have the lowest margins among all the segments.
CGS International (CGSI) Research, however, holds a different view on BAT Malaysia, encouraging investors to increase its holdings of the tobacco company on expectations of a turnaround in FY25 and FY26.
The research firm said it expects BAT Malaysia's earnings to continue to improve in the remaining quarters of FY24 on the back of higher private consumption growth and demand for Vuse.
"We maintain our thesis that BAT’s core earnings should bottom in FY24F before turning around in FY25F and FY26F as its investments in its vape product, Vuse, lead to growth in sales and market share.
"BAT currently trades at an undemanding 10.6x FY26F P/E, which is one standard deviation below its five-year mean of 15.3x, supported by 8-9% dividend yields over FY24-26F," it said in a note.
CGSI has an "add" call and a price target of RM9.77 on BAT Malaysia.
HLIB, on the other hand, ceased coverage of British American Tobacco (M) Bhd as it believes the group's outlook faces a structural decline while investor interest is lacking.
"Due to a lack of institutional investor interest and the reallocation of our internal resources, we cease coverage on BAT.
"Our previous forecasts, call, and target price should no longer be used as a reference going forward," it said.
HLIB's last target price was RM6.47 a share, a 23% discount from the last closing price of RM6.47.
