Cloudy sentiment prevails over BAT

PETALING JAYA: With illegal cigarettes dominating total industry volumes, proliferating at 56.1%, analysts are downbeat over British American Tobacco (Malaysia) Bhd (BAT), which saw a fall in earnings for the third quarter ended Sept 30 due to lower sales volume and high incidence of proliferation of illicit cigarettes.

“Risks to BAT include a further unexpected excise revision fuelling the acceleration of dwindling volumes, the continued spread of the illicit market,” said HLIB Research.

The research house, which has a “hold” call on the stock at a reduced target price (TP) of RM38.43 from RM40.55, said counterfeits featuring fake tax stamps had distorted the estimated illicit market share which, as at August 2017, was 56.1%, thus reinforcing pessimism over the tobacco sector.

Despite signs of improvement, HLIB noted that the market share of illegal cigarettes is still high.

Meanwhile AmBank Research, which maintained a “sell” call on the stock at a TP of RM36.70, said while it favours the company’s foresight and adaptability to transform its modus operandi into a trading model to negate high fixed cost, regulatory hurdles and disruptive substitute tobacco products may prove too steep for BAT to overcome.

The group recorded restructuring expenses of RM2 million during the quarter, comprising on-going cost of the project and outplacement programmes.

Ambank Research noted that earnings of BAT, which saw a 23.66% decline in net profit for the quarter under review of RM143.18 million from RM212.62 million a year ago, is within the research house’s estimates, but below consensus estimates.