This article first appeared in The Edge Financial Daily, on March 18, 2016.
KUALA LUMPUR: British American Tobacco (Malaysia) Bhd (BAT), which had been wrestling with high sin taxes and a growing illicit market — and just weeks after fellow tobacco player JT International Bhd (JTI Malaysia) said the country had reached a tipping point in terms of the amount of tax the industry can absorb — has decided to close down its factory in Petaling Jaya and source tobacco products from its sister companies in the region.
The closure of the factory in Jalan Universiti will be done in stages and will be completed by the second half of next year, as part of a restructuring exercise, said BAT, which counts Peter Stuyvesant, Dunhill and Pall Mall among its brands of cigarettes, in a filing with Bursa Malaysia yesterday.
The move will see BAT let go of 230 workers with a benefits package and an option to go through a career transition programme.
“The restructuring is in line with the company’s efforts towards realising a new and more sustainable business model, amid an increasingly challenging business environment. The high-excise environment has ultimately led to the sharp rise in illegal cigarettes and significantly lower legal sales volumes, resulting in rising cigarette production costs,” said BAT.
Its wholly-owned subsidiary, Tobacco Importers and Manufacturers Sdn Bhd, will wind down the factory, which sits right smack at the intersection that used to be a roundabout colloquially referred to as the “Rothmans Roundabout”, coined after BAT’s previous name, Rothmans of Pall Mall (Malaysia) Bhd. The company manufactures tobacco products and semi-finished goods, such as processed tobacco, at the factory.
“This increasingly challenging environment requires the company to restructure and transform its business which, apart from the winding down of factory operations, includes the sharpening of its commercial capabilities whilst optimising the supply chain and transactional activities to ensure that BAT remains a competitive consumer-focused market leader,” said BAT.
The local tobacco industry had to contend with three rounds of excise-duty hike between 2013 and 2016. Tobacco tax rose 14% in September 2013, 12% in November 2014 and a whopping 36% in November 2015.
The last round of hike prompted BAT managing director Stefano Clini to express his “extreme disappointment and shock” as he could not imagine the impact the hike would have on the industry.
To compound matters, the excise-duty hike came after the introduction of the goods and services tax (GST) last April.
In an interview with The Edge Financial Daily early this month, JTI Malaysia general manager Guilherme Silva said there had been a 20% decline in legal industry volume over the last three months, following the excise-duty hike in November last year.
“We have reached the tipping point. If there is further movement in the prices of cigarettes, the tobacco industry would collapse,” he said. JTI Malaysia is the country’s second-largest tobacco company with a 22% market share, after BAT (62.1%).
Following the closure of the factory, BAT plans to sell the land on which it is located via a public tender exercise that is expected to be completed around May — subject to shareholders’ approval. According to the group’s latest annual report, its two plots of land in Petaling Jaya — collectively measuring 49,605.44 sq m — had a net book value of RM57.48 million as at Sept 30, 1961.
BAT, the only public-listed tobacco player on the local exchange, announced a 1.7% year-on-year increase in net profit for its financial year ended Dec 31, 2015 (FY15) to RM913.31 million or RM3.187 a share last month, though revenue fell 4.6% to RM4.58 billion.
The same announcement also showed a 13.5% decline in its domestic volume versus the 8.2 billion sticks it sold in 2014, due to weaker market sentiment post-GST and the impact of the “unusually large November excise increase”. The 2014 figure was down 300 million sticks from the volume it recorded in 2013.