KUALA LUMPUR (Dec 4): The share price of British American Tobacco (Malaysia) Bhd (BAT) has jumped 26% in just a month to its highest in six months, which saw the only listed tobacco manufacturer on Bursa Malaysia adding over half a billion ringgit during the period to its market capitalisation, which now stands at RM3.62 billion.

The stock was the fourth largest gainer by value on Bursa Malaysia yesterday. It rose as much as 7.97% or 96 sen in the morning, before paring some gains to finish at RM12.66 — still up 5.15% or 62 sen from Wednesday's close. 

From the trough of RM8.80 on March 23 of this year, the counter has climbed 43.9%. Still, it is down 10.1% year-to-date, from when it was trading at RM14.08.

Once trading at its all-time high of RM52.61 in 2014, BAT has been hovering below the RM20-level since August 2019, as its earnings declined amid a continued contraction of the legal cigarette market.

The recent rally in its share price, however, has pushed the stock past analysts’ consensus target price (TP) of RM11.08 by 14.3%, with the stock surpassing the TP of 12, out of 14 research houses that cover it, according to Bloomberg data at market close yesterday.

The stock currently has five 'Buy' calls, seven 'Holds', and two 'Sells', according to Bloomberg.

In terms of valuation, BAT is trading at a trailing 12-month price-to-earnings (TTM P/E) of 13.55 times, compared with 11.54 times at the beginning of this year. Still, it is cheaper when compared with its five-year average P/E of 14.68 times.

And with an indicative dividend yield of 7.03%, BAT would be deemed attractive by investors who look for dividend stocks.

In its latest note to clients, CGS-CIMB Research raised its earnings forecast for financial year 2021 (FY21) and FY22 by 4%-5%, as it increased its sales assumptions on BAT's flagship Dunhill and its value-for-money brand Kyo, as sales rebound following the supply disruption seen under initial phases of the movement control order period.

"There could be potential upside to our forecasts. For one, our revised aggregate sales growth of 4% year-on-year for FY21 may be conservative if the Royal Malaysian Customs Department can effectively clamp down on cigarette transshipments next year. Our 3% y-o-y sales growth assumption for Dunhill will not bring back its FY21 sales volume to pre-MCO levels. It is inevitable that more smokers will down-trade or switch to vapes.

"But BAT will be in for a treat, if Dunhill’s sales can grow at a bigger clip than what we have pencilled in. As expensive as Dunhill is, the demand seems to hold steady among the higher-income, older smokers that have associated the brand with “prestige” and “quality”. The group said Dunhill held circa 55% of the legal premium cigarettes’ market share year-to-date," its analyst Kamarul Anwar wrote.  

Kamarul also raised his TP on BAT to RM17.48 — representing 38.1% upside from the current closing price — from RM12.65 previously, with an unchanged 'Buy' call, mainly due to the upward revision in BAT’s long-term growth rate to 3% from 1%, on the back of improving sales prospects. At the time of writing, this TP revision is the highest seen among those who cover the stock.

Optimism on the tobacco manufacturer’s prospects came after the government announced measures under Budget 2021 to strengthen enforcement against the illegal cigarette trade, including the bolstering of the Multi-Agency Task Force with the participation of the Malaysian Anti-Corruption Commission and the National Financial Crime Centre to combat the black economy.

The government would also be looking at limiting transshipments of cigarettes to dedicated ports, as well as imposing a tax on the import of cigarettes with drawback facilities for reexport.

The transhipment of cigarettes and the reexport of cigarettes by small boats would also be disallowed, according to Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz when reading out the budget speech, with such products only allowed to be transported in internationally recognised intermodal containers.

In addition, he said the government would be tightening the renewal for cigarette import licences through a review of licence conditions, including the imposition of import quota.

Malaysia's illegal cigarette trade reached a new all-time monthly high of 64.5% in August from 62% a month prior, according to the latest Illicit Cigarettes Study (ICS) by the Confederation of Malaysian Tobacco Manufacturers (CMTM).