BAT profit takes a hit

Tobacco firm earnings down 32.7% as a result of competitive pressures

PETALING JAYA: British American Tobacco (M) Bhd’s (BAT) profit in the third quarter has taken a hit, plunging by about a third, from a host of competitive pressures.

The illegal cigarette market, persistent pressure on consumer spending power and competitive entries in the legal low-price segment drove BAT’s net profit in the third quarter ended Sept 30 down 32.7% to RM143.2mil from RM212.6mil a year ago. Revenue for the quarter declined 18.8% to RM757.3mil from RM932.1mil previously.

BAT said the incidence of illegal cigarettes had increased to 56.1% as of August this year from 51% last year.

“This was driven by the price gap between legal and illegal cigarettes and the current macroeconomic factors that are impacting consumer spending power,” it said in a filing with Bursa Malaysia yesterday.

The brands under BAT’s umbrella include Dunhill, Benson & Hedges and Kent, while its value-for-money segment brands are Peter Stuyvesant and Pall Mall.

On a quarter-to-quarter basis this year, BAT said it registered a marginal decline in market share in the legal market of 0.6% to 53.9%, mainly driven by a drop in people smoking Dunhill.

“The decline in share is mainly the result of new entries in the legal low-price segment and the new dynamic of legally perceived brands with fake tax stamps,” BAT said in the statement.

Managing director Erik Stoel ( pic) said: “The challenge of the legal industry remains the pressure on the legal market size and BAT Malaysia’s future outlook will be dependent on what initiatives are implemented to reduce illegal cigarette consumption.

“The legal tobacco market currently constitutes only 44% of total consumption in Malaysia,” he added.

Cumulatively, for the first nine months of the year, the company posted a slight decline of 7.3% in net profit to RM401.5mil from RM433.0mil last year. It has declared a lower dividend payout of RM1.26 a share for the period under review, compared with RM1.55 a year ago.

Its revenue for the period fell 21% to RM2.3bil from RM2.9bil previously.

BAT said the drop in revenue was in line with volume decline and the cessation of contract manufacturing for exports as of Dec 31, 2016.

“This led to a gross profit deterioration of 18.8% or RM188mil versus the same period last year,” it said.

Nonetheless, the company said that its operation expenses in the first nine months of the year were 17% or RM54mil lower than the same period last year due to its transformation initiatives, including the sub-lease of unutilised space.

BAT said the outlook for the remaining period of 2017 and 2018 would depend on the recovery of the legal market. “The group remains concerned with legal volumes continuing to be impacted by the current high incidence of the illegal cigarette trade,” it said.

Shares in BAT closed 24 sen higher to RM42.60 yesterday.

Meanwhile, on the proposal related to smaller cigarette packs, Stoel said it would contribute to reducing the problem of illegal cigarettes.

“Illegal cigarettes are not just a challenge for the legal industry. It is a societal problem that fuels many more societal issues.

“With the proposal on smaller packs, we try to give adult smokers a legal and affordable option that can reduce the illegal cigarette incidence and consumption.

“In addition, it would help the sustainability of the legal industry as well as generate more government revenue,” he said.