BAT market cap goes up in smoke


BRITISH American Tobacco (M) Bhd (BAT), once the top pick counter for investors, has lost some RM19.94 billion in market capitalisation since its peak in 2014 due to competition from the black market.

The company’s share price closed at a fresh low of RM11.14 last Friday on heavy volumes, well below its historic high of RM69.82 on Sept 30, 2014.

Its 84.05% fall in value up to last Friday came as BAT’s trading volume of 3.28 million shares was more than six times the 20-day average with the counter closing at the lowest since September 1993. The cigarette maker is now valued at RM3.18 billion.

TA Securities Holdings Bhd analyst Jeff Lye Zhen Xiong said the company’s future earnings are not favourable.

“BAT used to have a double-digit valuation premium, but the valuation has retraced a lot since the company is no longer a monopoly. The company is undergoing a lot of challenges, it is shrinking the size of its workforce, so the earnings don’t seem promising,” he told The Malaysian Reserve.

BAT is now facing competition from the black market which accounts for 65% of the tobacco market.

In the third quarter ended September 2019, BAT reported its third consecutive drop in net profit.

Its earnings in the three months fell 42% year-on-year (YoY) to RM84.8 million driven by the rampant trading of illegal products.

Revenue for the quarter dropped 20.55% YoY to RM584.34 million, mainly on lower volume as a result of legal market contracting and the absence of one-off factors reported in the same period last year such as the benefit from the Goods and Services Tax removal and prior-year tax stamps refunds.

Lye said the government’s smoking ban, which came into force on Jan 1, 2020, will impact BAT’s earnings in the year.

“BAT’s sales last year was already affected by the educational period of the smoking ban,” he said.

Given the uncertainty of BAT’s future earnings, Hong Leong Investment Bank Bhd (HLIB) has tweaked its discounted cashflow for BAT from 9.2% weighted average cost of capital to 9.5%.

The firm has also lowered the target price for BAT to RM15.28 from RM16.

“While we see Glo as a viable product offering for Malaysian consumers from BAT, we understand it will take a significant amount of time and marketing investment for it to have a significant impact on earnings.

“Furthermore, given the relatively high cost of refills (RM14 vs <RM5 for illicit tobacco), we do not see Glo eating into the chronic illicit tobacco market share,” HLIB analyst Gan Huan Wen noted in a recent note.

Glo is a tobacco heating product recently launched by BAT in response to IQOS, which was initiated by Philip Morris International in late-2018.