Affordability the real problem for tobacco industry


THE tobacco industry in the country is structurally dogged by a mismatch between high cigarette prices and low disposable incomes, making affordability the real problem.

CGS-CIMB Securities Sdn Bhd analyst Kamarul Anwar stated that criminal syndicates would continue to serve the illicit market despite roadblocks being placed due to persisting demand.

“Malaysians cannot afford legal cigarettes as they lack the purchasing power,” Kamarul wrote in a research report on Monday.

He said Malaysia’s cigarettes are one of the most expensive in the world relative to income, based on its proprietary analysis on the ratio of local cigarette prices to minimum wages of various countries.

Kamarul was responding following a media report that exposed “Ben Gang”, which was said to have a stranglehold on Malaysia’s contraband cigarette market.

He noted when the government placed an embargo on cigarette transhipment at seaports from Jan 1, 2021, onwards to curb smuggling, the syndicate recalibrated its modus operandi, according to the media report.

After smuggling in cigarettes from Vietnam, the products were moved to barter boats to be traded in international waters.

The cigarettes would then be shifted to fishermen boats before being unloaded at specific beaches, based on the media article.

Kamarul said the weak purchasing power continues to deteriorate amid the Movement Control Order (MCO), with Malaysia’s median income sinking 15.6% year-on-year (YoY) to RM2,062 per month in 2020.

“With desperate times come desperate measures; the article revealed that fishermen and tourist boat owners assisted the gang’s smuggling activities to supplement their diminishing incomes,” he noted.

CGS-CIMB reiterated a ‘Hold’ rating on British American Tobacco (M) Bhd (BAT) with a dividend discount model-based target price (TP) of RM15.40.

The brokerage firm maintained its financial year 2021 forward (FY21F) revenue projection of RM2.5 billion for BAT, 7.7% higher YoY but a tad shy of FY19’s RM2.51 billion.

Kamarul had not highlighted the cigarette transhipment ban as a possible catalyst for BAT simply because this alone could not effectively thwart a multibillion-ringgit criminal activity.

The broker expects BAT’s sales volume to grow YoY in FY21F due to the belief that more smokers who had kicked the habit were lighting up again during the lockdown.

Still, Kamarul said this might not be enough to push BAT’s sales to prior levels.

“The phenomenon of Malaysians erecting white flags to plead for food and other supplies as the MCO stretches on brings a risk that BAT’s sales may not continue to grow in FY22-23F.

“We still believe BAT’s catalyst lies in the legalisation of electronic cigarettes and vaporisers products,” he said.

He said this might not occur in 2021 as the Parliament will only resume tentatively in September 2021 and there may be other more pressing issues to be hashed out first.