No clear skies yet for British American Tobacco
KUALA LUMPUR: British American Tobacco Bhd (BAT) continues to see its earnings chipped away by illegal trade which remains rampant, dwindling market share as well as its ongoing cost rationalisation efforts.
According to Affin Hwang Investment Bank Bhd (AffinHwang Capital), legal factory-made cigarettes (FMC) industry volumes have been spiralling down over the years, now recording on average 481 million sticks per month – which has more than halved as compared to the peak 1,100 sticks per month seen back in 2012.
“Illegal cigarette trade remains by far the biggest challenge for tobacco players, with illicit incidence hovering stubbornly high at 69 per cent, comprising of 58 per cent of illegal FMC and 11 per cent illegal vape,” it said in a company outlook yesterday.
“In spite of the movement control order (MCO) from March 18 to May 5, tobacco black market remains rife as perpetrators seek out various channels to deliver their illicit goods – for instance by way of selling on social media, distribution via e-hailing services and avoiding road blocks by distributing within a “10km radius”.”
Nevertheless, AffinHwang Capital was encouraged by BAT’s ongoing engagement with the relevant authorities (after the change in government) in recent periods post the MCO.
“We gathered that heightened enforcement actions had in certain cases pushed up the price point of illegal cigarettes, due to the disruption in supplies,” revealed.
“The authorities are said to be generally receptive towards an effective solution to eradicate illicit market and hence the management is upbeat on positive outcomes in the buildup to Budget 2021.
“Nonetheless, despite evidence of enforcement activities, unless more radical actions are taken, we are of the view that the illicit market is unlikely to abate in a sizable manner over the near term.”
On top of the legal industry contraction, BAT’s domestic volumes have also been registering even sharper declines year on year (y-o-y), leading to its shrinking market share.
This is particularly apparent in the first quarter of 2020 (1Q20) with BAT showing a stark difference in volume decline of 21 per cent y-oy against that of the legal industry volume which only fell by 11 per cent y-o-y.
“This potentially suggests an increasingly competitive landscape, especially from the two other major tobacco players, Japan Tobacco International Bhd (JTI) and Phillip Morris International (PMI),” AffinHwang Capital compared.
“Based on latest available data, BAT’s 2019 industry market share now stands at 54.4 per cent, having declined since 2015 (from 61.2 per cent). On the contrary, JTI and PMI both seem to have garnered greater market shares over the period.
“With retail product prices largely indifferent between the Big 3, the possible inference leading to higher market share for JTI and PMI could partly be down to more effective marketing initiatives and better brand appeal.”
Elsewhere, to align with realities of the tough business conditions, BAT has undergone an aggressive cost cutting exercise in order to achieve a sustainable cost base.
The latest cost rationalisation measure involving a 20 per cent headcount reduction (approximately 100 positions) represents the largest restructuring since the closure of BAT’s manufacturing facility back in 2017.
“Over and above other broad-based cost optimisation, we estimate annual savings of circa RM30 million from the latest round of cost rationalisation initiatives,” AffinHwang Capital concluded.