Vape, VFM brands threaten BAT’s earnings


THE growing number of vape users and interest in the value-for-money (VFM) brands could remain as hurdles for British American Tobacco (M) Bhd (BAT) despite the higher revenue booked in its recent quarter.

Hong Leong Investment Bank Bhd (HLIB) said the revenue increase was due to the low base effect.

“While revenue was higher in the first quarter of 2021 (1Q21), it was in line with the increased legal volumes of 19%, which may seem promising due to a low base effect. Note the 1Q20 revenue figure was the lowest recorded by BAT in over 10 years.

“Two large hurdles still remain for BAT — the rise in vape users, which is estimated to account for more than 10% of the total market in Malaysia, and consumers continuing the downtrading to VFM brands,” the research house wrote in a note yesterday.

HLIB said VFM brands cost the same to produce, but are sold at lower prices, resulting in thinner margins.

It noted that VFM brands are estimated to have grown from 14% of the total legal market in financial year 2018 to about 30% now.

CGS-CIMB Securities Sdn Bhd analyst Kamarul Anwar noted that BAT seemed optimistic of growing sales volume further.

“Unlike in past years, BAT sounded more optimistic of higher sales ahead, notwithstanding the usual call to the government to enhance enforcement efforts to thwart illicit trade.

“Part of its sales revival plan included augmenting its market position in the premium segment,” Kamarul said in a research report yesterday.

He said the sales turnaround plan was deemed not feasible a few years ago. It is a plausible target now because the Covid-19 pandemic has caused lapsed smokers to return to their old habits.

He said downside risks on BAT’s earnings are the plummeting sales volume and the margins narrowing further from more downtrading.

BAT Malaysia’s 1Q21 net profit rose 24.32% year-on-year (YoY) to RM63.11 million, supported by its domestic volume growth.

Revenue increased 17.75% YoY to RM566.55 million, strengthening the group’s total market share to 52.3%, backed by its strategic brands such as Dunhill, Rothmans and KYO.

HLIB downgraded its recommendation to ‘Sell’ on BAT with a target price (TP) of RM11.75, while CGS-CIMB called for ‘Hold’ with a TP of RM15.40.

BAT’s shares fell RM1 or 6.35% to RM14.76 yesterday, valuing the company at RM4.21 billion.