Shifting to Indonesia?

PETALING JAYA: The gradual shutdown of British American Tobacco (Malaysia) Bhd’s (BAT) factory in Malaysia has fuelled speculation that the company will relocate its production facility to Indonesia, which analysts said is a “viable option” considering that the operating costs there are lower than in Malaysia.
“We’ve heard of this, but there is no confirmation from them (BAT),” an analyst who declined to be named told SunBiz.
BAT had not responded to queries at press time.
The analyst acknowledged that cost of production – labour, electricity and taxation – in Indonesia is lower than in Malaysia, a strong compelling reason for businesses to undertake a relocation exercise.
“Every company has its own policy, including procurement policy. So the company needs to look at the regional market. When it comes to economies of scale, they might want to centralise a certain market and the rest will become distribution centres,” he explained.
BAT’s move to close down its plant in Malaysia has raised the question of whether Malaysia may have started losing its competitiveness to its peers.
On this, the analyst said it is still too early to make such an assumption, but cautioned that the winding down of BAT’s plant has sent a message that the domestic business environment is not optimistic.
“We can’t really say Malaysia has lost its competitiveness based on a single incident, we need more details,” he said.
London-listed British American Tobacco Group, the parent of BAT, has 44 factories in 41 countries, with the nearest being Indonesia, Vietnam, Sri Lanka and Bangladesh.
Analysts said BAT’s decision supports their negative stance on the Malaysian tobacco industry’s growth prospects.
“While we think that the operational restructuring is positive for BAT to protect its interests, the exercise is indirectly sending a negative message reaffirming our bearish and pessimistic view on the outlook of the local tobacco sector which has been severely dented by the high excise duty structure and significant illicit trade,” said Kenanga Research.
AllianceDBS Research noted that the difficult sector landscape is dragged by declining cigarette consumption per capita due to an increasingly health-conscious population, continued high illicit trades, regulatory risks and the emergence of alternative product offerings such as e-cigarettes.
It highlighted that the closing down of BAT’s factory in phases will eventually eliminate its contract manufacturing for export business, which contributed less than 10% of its total revenue in FY15.
Hong Leong Investment Bank (HLIB) Research believes that an overall shift in strategy is positive for BAT as management is structurally changing the group’s cost structure due to limited topline growth on the back of decreasing industry volumes.
BAT’s restructuring exercise will also pave the way for it to unlock the value of its land measuring 11.6 acres. The land was last revalued in 1961 and has a net book value of RM57 million or RM114 per square foot (psf).
Based on AmResearch’s channel checks and recent transaction price for land deals in the area, the psf price ranges from RM350 for industrial land to RM500 for those approved for commercial use.
With potential cash receipts from one-off gains on the disposal, the research house does not rule out BAT paying a special dividend in the near term although the quantum may not be significant.
Looking forward, Kenanga Research expects BAT’s volume growth to be soft with the latest round of price increase which encourages down trading to illicit cigarettes.
Kenanga Research does not foresee another price increase upon the expiry of the Anti-Profiteering Act mechanism to determine unreasonably high profit in June 2016 in view of the fragile sentiment and threat of illicit trades.
“Thus, we think that gaining higher market share is more relevant for the group to sustain its earnings growth momentum through innovative new product launches and marketing campaigns,” it said.
BAT shares closed down 0.04% at RM55.30 last Friday. Some 956,000 shares changed hands.