BAT rises on Budget 2021 announcement on illegal cigarettes crackdown


BRITISH American Tobacco (M) Bhd (BAT) is poised to benefit from the Budget 2021 announcement on the government’s commitment to curb the illegal trade of cigarettes, says RHB Research Institute Sdn Bhd.

RHB has upgraded the counter to a ‘Buy’ with an increased target price (TP) of RM12 from RM10.80 which translates into an 8% dividend yield for the stock.

BAT rose 76 sen or 7.4% to RM10.98 at close yesterday.

RHB analyst Soong Wei Siang noted that the government’s intention to address issues surrounding the illegal tobacco trade can turn the BAT fortunes and give the company a compelling risk rewarding factor.

“This can be a turning point for the company, as we believe cigarette transshipment is a key channel for illicit trade,” he said.

According to Soong, unfair competition from the illegal trading of cigarettes and the unregulated next-generation cigarette products has plagued the tobacco industry in the country for years.

“The government’s measures to curb the trade of illicit cigarettes under the recent Budget 2021 are measures that will help preserve the livelihood of the tobacco industry,” the analyst said in a research note yesterday.

The government outlined the importance of revenue collection strategies by addressing the smuggling of high-duty goods in the Budget 2021 last Friday.

Measures will start to be implemented from Jan 1, 2021, including the Multi-Agency Task Force and cigarette transshipment rules will also be tightened.

“Essentially, the excise duty rate, while remaining unchanged for conventional cigarettes, will be imposed on next-generation cigarette devices and the liquid consumables,” Soong added.

The research outfit further highlighted the imposition of excise duty on next-generation products may imply the advent of a proper regulatory framework that could provide a level the playing field between conventional and next-generation products, and may pave the way for the legal players to introduce their own products.

Downside risk to the outlook will include ineffective execution from enforcement authorities, as well as competition within the industry that is strong.

BAT recorded a net profit of RM63.74 million, up 16.72% year-on-year (YoY) for the third quarter ended Sept 30, 2020 as revenue increased 14.81% YoY in the same period to RM627.52 million.

BAT declared a dividend of 21 sen per share, bringing its cumulative dividends for the nine months ended Sept 30, 2020 (9MFY20) to 56 sen.

In its filing to Bursa Malaysia on Oct 28, BAT’s year-to-date (YTD) performance is overshadowed by the growth of the tobacco and vaping black market, which grew from 69% to 70%.

It pointed out the growing concern over the tobacco black market that has also been increasing over the past quarter from 60.5% to 64.5% share of the total market.

Illicit cigarette trades leaked roughly RM80 million in loss for the government in revenue for the quarter.

The group launched the “Stop the Black Market” campaign this year to drive urgent policy change to address this issue in which the only possible approach being one that is holistic, requiring significant enforcement and structural excise reform.