Cover story: BAT Malaysia posts its first profit growth since 2015

UNCERTAINTY surrounding a potential new law banning smoking and selling tobacco products to anyone born after 2005, in a move dubbed the ‘generational endgame’, could continue to weigh on British American Tobacco (Malaysia) Bhd (BAT Malaysia) in the short term, analysts say.

Its share price has fallen 6% since Health Minister Khairy Jamaluddin announced on Feb. 17 that the government was seeking to implement the law in Malaysia. The stock closed at RM11.82 last Wednesday, giving the company a market capitalization of RM3.37 billion.

According to Kamarul Anwar Kamaruddin, an analyst at CGS-CIMB Research, if the bill is passed, it will prevent BAT Malaysia from rebuilding its customer base. He expects the black market for tobacco products to continue to thrive in such a scenario.

“The prohibition of alcohol in the 1920s in the United States illustrated how an outright prohibition of vices eventually led to the proliferation of such products on the black market, which created another set of social and In Malaysia, the increase in excise duties on cigarettes has only perpetuated the black market in tobacco and vaping,” he said in a February 16 report.

“In our view, smoking is not only a health problem, but also a socio-economic problem. Smoking is more prevalent among low-income people worldwide, and in Malaysia more than 74% of smokers come from households with incomes below the 2016 national household median, according to survey findings national report on health and morbidity of 2015.

Hong Leong Investment Bank Research (HLIB Research) analyst Sophie Chua Siu Li agrees that the potential generational smoking ban would be detrimental to BAT Malaysia, considering it would lead to a gradual decline in its customer base. She believes that excessive regulation will likely fuel sales of illicit cigarettes as affected consumers turn to the black market.

“If a generational ban on vaping were put in place, it would be counterintuitive in nature because vaping is a less harmful alternative available to smokers. Although this is not meant to be implemented in the short term, we believe that the gradual reduction of its customer base would be detrimental to BAT Malaysia in the longer term,” she said in a February 17 note.

CGS-CIMB Research and HLIB Research are standing by their guidance for fiscal 2022 and 2023 at this time, but note that the idea of ​​banning future generations from vaping could thwart BAT Malaysia’s upcoming vape bet.

“Already, this alleged catalyst has been tempered by the high excise duties on vaping liquids and gels offered by the Ministry of Finance. The planned regulation poses a risk to BAT Malaysia’s long-term earnings outlook, cash flow and dividend payments as it could erode its customer base over time,” says Kamarul Anwar.

BAT Malaysia, which offers cigarette brands such as Dunhill, Kent, Peter Stuyvesant, Pall Mall and Rothmans, is the country’s only publicly traded tobacco company. JT International Bhd went private in June 2014, when it was purchased by its majority shareholder, Japan Tobacco Inc.

Bloomberg data shows that of the 16 analysts covering BAT Malaysia, six have a “buy” rating, 12 have a “hold” call and two recommend a “sell”. The consensus target price is RM13.56, which is up 15% from last Wednesday’s closing price of RM11.82. The stock is currently trading at a one-year forward price-to-earnings ratio of 12.11 times. Based on the consensus estimate of the dividend per share of 96 sen for the year ended December 31, 2022 (FY2022), the meter currently offers a yield of 8.12%.


BAT Malaysia ended fiscal 2021 on a high note, with impressive net profit growth of 17.8% year-on-year (YOY) to RM284.86 million – its first since 2015, and growth in volume for the first time since 2002. Revenue increased by 14% to RM2.64 billion in fiscal 2021 from RM2.32 billion in fiscal 2020.

Maybank Investment Bank research analyst Jade Tam said BAT Malaysia management shared that its volume grew 5% year-on-year in fiscal 2021, mainly due to new market strategies through online sales and telesales, instead of relying solely on exclusive distributors to promote their products, and the recovery of legal money volumes from stricter transshipment regulations from January 2021.

It expects volume growth for fiscal 2022 to remain positive as the economy reopens after the pandemic. “Accelerating government enforcement in key areas will also lead to more legal volumes returning to the industry,” she adds.

To date, Philip Morris (Malaysia) Sdn Bhd is the only tobacco company to have introduced a Reduced Risk Product (RRP) – IQOS – in Malaysia, which it launched in 2018. BAT Malaysia and JT International Bhd have adopted a waiting strategy. and-see approach until there is an appropriate regulatory framework for nicotine vaping.

Chua of HLIB Research notes that BAT Malaysia made investments to improve its vaping readiness at 4QFY2021, to ensure the group is ready to introduce its own line of nicotine vaping products, under its Vuse brand. on the market once vaping products are legalized.

“We emphasize that it is still unclear whether Vuse’s introduction will be margin accretive or dilutive at this stage, as much will depend on the regulated pricing of the product. However, given the initial marketing and promotion to encourage a switch to Vuse, we believe the new vaping product line is unlikely to contribute materially to business results,” she wrote.

UOB Kay Hian Malaysia analyst Philip Wong believes that the profit impact of the proposed legislation should be more than offset by the legalization of the currently untapped vaping segment. He points out that nicotine vaping is estimated to account for 11% of the overall tobacco market in Malaysia and around 40% of the traditional legal cigarette industry.

“Therefore, the legalization of the lucrative and important segment is a net positive despite some cannibalization and phasing out of smoking through a potential generational endgame hinted at by the Minister of Health,” he wrote in a report dated 21 January.

According to Wong, the country’s largest tobacco company is set to gain a significant foothold in the nicotine vaping segment once it is legalized in Malaysia, given its proven leadership in major established markets. Currently, Vuse has an average market share of 45% in the vaping category in the US, UK, Canada, France, and Germany.