Raging illicit trade amidst MCO impacts British American Tobacco
KUCHING: The movement control order ( MCO) did little to impede the growth of illicit cigarette trade as it continues to challenge the legal tobacco market, affecting players such as British American Tobacco Bhd (BAT).
This comes as BAT announced a core net profit of RM55 million for its first quarter of financial year 2020 (1QFY20) which came in below consensus estimates at only 17 per cent.
Kenanga Investment Bank Bhd ( Kenanga Research) attributed the shortfall to the worse-thanexpected contraction in product volume which dropped by 18 per cent year on year (y- o-y) and 24 per cent quarter on quarter (q- o- q).
“Illicit trades continue to take the centre stage. Moving forward, the group’s outlook seems to remain bleak, as the economic impact from the pandemic outbreak is likely to have a prolonged effect on its profitability by aggravating its already harsh operating environment,” it said in a note on the group.
“Weaker purchasing power caused by a disrupted economy may very well exacerbate the issue of affordability, and divert smokers to illicit cigarettes which is currently taking up about 69 per cent of market share).
‘ Moreover, the illegal cigarette syndicates have proven to be more resilient than expected, as we gathered that they have made further in-roads in spite of the MCO such as by distributing within 10km radius, selling online and delivering via courier.
“Therefore, we maintain our view that any meaningful recovery would only materialise with a sustained clampdown on illegal cigarettes.”
On a yearly basis, BAT’s 1QFY20 revenue dropped by 22.5 per cent no thanks to the continual shrinkage in legal market volume and BAT product volume due to ffordability issues as well as a shift in demand towards illegal vaping products.
Furthermore, the group’s duty free business -- which makes up about four per cent of its total revenue -- was heavily impacted by the fall in passenger traffic during the pandemic outbreak, which also contributed to the decrease in revenue.
Consequently, core net profit fell by 37.9 per cent, dragged by poorer product mix as smokers traded down to lower-margin value-for-money ( VFM) product.
“Post-results, we slashed our FY20E and FY21E earnings by 35.1 and 32.1 per cents respectively, as we take into account the dwindling sales volume,” it continued.
“We downgrade BAT to underperform with a lower target price of RM10.05 per share. Despite the stock offering a fair dividend yield of circa 5.6 per cent, the lack of visible improvements in the operating environment remains a threat.”