This article first appeared in The Edge Financial Daily on April 19, 2017

KUALA LUMPUR: British American Tobacco (M) Bhd (BAT Malaysia), which saw its cigarette volume and market share fall last year as smokers switched to cheap, and sometimes illegal, alternatives, expects to report a modest volume and market share growth in the current financial year ending Dec 31, 2017 (FY17).

The positive outlook rests on the assumption that a further hike in excise duty is unlikely in the near term, said its managing director Erik Stoel (pic).

In FY16, the group saw its cigarette volume fall 27.8% year-on-year (y-o-y), while its market share declined 3.8% to 57.1% from 60.9% in FY15.

“The government has targeted to reduce illicit cigarette trade by half this year, which we think is ambitious considering the current market conditions. It is planning to aggressively curb [illegal cigarette] retailers with higher fines, which we think is very important,” he told reporters after the group’s annual general meeting yesterday.

“We are glad that the government shares our view that increasing excise hike is not good for the health agenda, state budget and the legal cigarette industry,” he added.

Second Finance Minister Datuk Seri Johari Abdul Ghani was reported by The Edge Malaysia weekly last week as saying that there were no immediate plans to increase excise duty on tobacco products and efforts were ongoing to pressure illegal cigarette trade. This followed remarks made by Deputy Health Minister Datuk Seri Dr Hilmi Yahaya for the government to raise cigarette prices to RM21.50 per 20-stick pack from RM17 now to deter people from smoking.

Already, local tobacco players have been hit hard by the last excise duty hike of some 40% in November 2015, which was also blamed for a spurt in illicit sale of cigarettes in the country.

BAT Malaysia reported a 19.8% drop in net profit to RM732.07 million in FY16 from RM913.31 million in FY15 in tandem with the fall in both its sales volume and market share. Revenue also fell 18% to RM3.76 billion from RM4.58 billion.

Stoel said BAT Malaysia is maintaining focus on the premium market segment despite lower consumer spending and the presence of cheaper alternatives, as it keep tabs on the progress of the fight against illegal cigarette trading in Malaysia.

He noted that the premium cigarette price is about half the daily disposable income of Malaysian middle income earners, which stood at around RM35.

“Interestingly, consumption of illegal cigarettes is more or less evenly distributed among different income groups,” he said, hoping that some of the consumers who opted for better prices will return to the well-known brands under BAT Malaysia this year.

The rest may smoke less, he added, which is a win for the health ministry.

On the winding down of its manufacturing business which includes the shutdown of its facility in Petaling Jaya, Selangor, Stoel said it is expected to be completed by the third quarter of this year. The move also sees 230 employees affected.

“The decision we made last year [was] for the group’s longer-term sustainability, and it has sharpened us a lot now,” said Stoel.

BAT Malaysia is now importing its cigarettes into Malaysia, which helped reduced its operating expenditure by 9% y-o-y in FY16.

Stoel also dismissed a possible hike in the prices of BAT Malaysia’s tobacco products. “We cannot, and we will not increase our own pricing. We are more interested in the sustainability of the market,” he said.