‘Oversight on tobacco consumption yields more gains for industry’

KUCHING: The authorities’ oversight on tobacco consumption yields substantially more potential gains than losses for the legal tobacco industry, analysts observe in a company update on British American Tobacco ( Malaysia) Bhd ( BAT).

Affin Hwang Investment Bank Bhd ( AffinHwang Capital) recalled that after enacting a smoking ban on eateries nationwide, the Ministry of Health ( MoH) is reported to be considering the designation of other public places as nonsmoking areas.

However, AffinHwang Capital believed the incremental impact would be more limited this time around, given that many public spaces had already been gazetted as smoke- free areas.

“In our view, the extension of the smoking ban in public spaces would be limited in scope this time, with as many as 19 types of places already covered by the ban since 2007, not including the recent ban on public parks and eateries nationwide.

“To recap, management had previously guided for a one per cent decline in total cigarette volume sales as a result of the smoking ban on eateries implemented on January 1, 2019,” the research firm said.

I n s t e a d , A f fin Hwang Capital highlighted that as the illicit cigarette trade, which commanded circa 62 per cent of 2018’ s total industry volume ( TIV), still dominates the local retailing of cigarettes, a shift in the industry’s share of the market would still be more impactful vis-?- vis any potential impact of smoking bans on the earnings of legal tobacco players.

“Based on our sensitivity analysis, a one percentage point ( ppt) shift in the illicit cigarette market share would translate into a 2.3 per cent change in BAT’s 2019E earnings per share ( EPS), while a one per cent decline in total cigarette volumes sold would translate into a corresponding one per cent decline in the 2019E EPS.”

The research firm recapped that its base case assumptions are for the illicit market share to fall to 55 per cent- 48 per cent- 40 per cent from 2019- 21E respectively, alongside a two per cent TIV decline per annum.

“We continue to believe that the authorities’ oversight on tobacco consumption yields substantially more potential gains than losses for the legal tobacco industry.

“As a whole, the probability of earnings expansion - underpinned by intensified crackdowns on the illicit cigarette trade alongside a plateauing illicit market - outstrips that of an earnings decline for BAT from the prohibition of smoking at additional public areas, in our view.”

As such, AffinHwang Capital continued to reiterate its ‘ buy’ recommendation on the stock with an unchanged target price of RM40.20 per share.