Friday 29 Mar 2024
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KUALA LUMPUR (July 13): British American Tobacco (Malaysia) Bhd (BAT) may get a shot in the arm as the new reformist government in Malaysia is expected to be aggressive in curbing illicit cigarette trade, which has been costing the government about RM4 billion in revenue.

"Given PH's (Pakatan Harapan's) pledge to eliminate corruption and restructure public finances, we believe it will be aggressive in narrowing the illegal market's share. BAT stands to benefit from this, as 58-63% cigarettes sold come from the black market. In the legal market, BAT is the leader, with a 54.7% share as at 1Q18 (first quarter of 2018)," said CGS CIMB in a note to clients today.

Its sensitivity analysis shows that every 1-percentage-point drop in the illicit tobacco market share would translate to a corresponding 2.7-percentage-point rise in BAT's forecast financial year 2018 (FY18) net profit growth, or an earnings per share increase of 4.8 sen.

According to CGS CIMB, since the Pakatan Harapan coalition took over Putrajaya in May, optimism for BAT's earnings recovery has pushed the stock up near 46% from its 11-year low of RM22.23.

"Even with the post-election jolt, BAT's 1-year forward P/E of 15.9x is still below its five-year forward mean P/E of 19.2x, and modest compared with other consumer stocks' weighted average CY19F P/E of 33x," it said.

"Our FY18F net profit estimate of RM556.6 million assumes a reduction of 3-4 percentage points in the illicit market, which we believe is achievable in one calendar year," said CGS CIMB, though it noted the nascent growth of Rothmans — BAT's value-for-money segment — could hurt BAT's forecast FY18 margins.

Since the segment's launch in October 2017, CIMB estimated that Rothmans, which is part of BAT's move to diversify its products, has made up nearly half of value-for-money cigarette sales.

"Although a margin-dilutive product, Rothmans can thrive on the volume game by attracting consumers of illicit tobacco," the research firm noted.

Going forward, CIMB said BAT has been considering introducing tobacco-heating products in the local market, should it receive the government's approval.

According to BAT's website, tobacco-heating products are devices that heat tobacco to generate a nicotine-containing aerosol with a tobacco taste, which the user inhales.

CGS CIMB is maintaining its 'add' call on BAT, saying it is upbeat on its earnings recovery potential, with attractive dividend yields of 5.9% to 7.1% in FY18 to FY20, and undemanding valuations.

Listed on the Main Market of Bursa Malaysia, BAT shares climbed 80 sen or 2.47% to close at RM33.20 today, giving it a market capitalisation of RM9.48 billion.

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