BAT to remain challenged by dwindling industry volume, poorer product mix

KUCHING: With sales and distribution activities expected to normalise a er the spike in May, analysts believe British American Tobacco (Malaysia) Bhd (BAT) will likely remain challenged by dwindling industry volume and poorer product mix.

Despite quarter on quarter (q-o-q) uptick in overall industry volumes, the research arm of Hong Leong Investment Bank Bhd (HLIB Research) did not expect this to continue.

“We reckon be er legal volumes in the second quarter of 2020 (2Q20) was mainly due to consumers having difficulty procuring illicit products during the Movement Control Order ( MCO) period,” HLIB Research said in its second quarter of financial year 2020 (2QFY20) results review on BAT.

“In the absence of any significant government intervention we do not see legal volumes picking up any time soon.”

Furthermore, the research arm expected consumers to continue to down-trade from premium brand Dunhill (RM17.40 per pack) to VFM brands Rothmans (RM12.40 per pack) or newly launched KYO (RM11.50 per pack) due to its cheaper shelf price.

HLIB Research noted that VFM share of legal volumes have doubled to 14 per cent in FY18 to 28 per cent in the first half of 2020 (1H20) at the expense of premium and aspirational brands.

It further noted that as the production costs are approximately the same, this will result in slimmer margins going forward.

“With sales and distribution activities expected to normalise a er the spike in May, we believe the group is likely to remain challenged by dwindling industry volume and poorer product mix,” the research arm of Kenanga Investment Bank Bhd (Kenanga Research) said.

“Weaker purchasing power caused by a disrupted economy may also very well exacerbate the issue of affordability, diverting smokers to illicit cigare es and vaping products.

“Therefore, we maintain our view that any meaningful recovery would only materialise with a sustained clampdown on illegal cigare es, which takes up circa 69 per cent of market share.”

Kenanga Research also noted that the group’s recently launched new KYO brand is priced slightly lower than Rothmans in the VFM segment, with hopes to capture a greater share of the down-trading activities in the legal market.