BAT confirms it will enter Malaysian vape market once regulatory framework firms up — CGS-CIMB

BAT confirms it will enter Malaysian vape market once regulatory framework firms up — CGS-CIMB
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KUALA LUMPUR (Nov 19): British American Tobacco (M) Bhd (BAT) has confirmed that it will introduce its vapes under the Vuse brand in the Malaysia market once the regulatory framework for the product category is finalised.

CGS-CIMB's analyst Kamarul Anwar said in a note yesterday that the tobacco group announced its planned foray into this growing market at a recent analyst briefing, which took place after the Budget 2021 tabling where it was announced that the government will impose an excise duty of 10% on electronic and non-electronic cigarettes, as well as 40 sen/ml on all e-cigarette and vape liquids from Jan 1 next year.

"As positive as we are on BAT’s decision to finally penetrate this growing market, there were a few details that were left unanswered. Chiefly, the timeline for BAT to launch its vapes is still uncertain. In fact, it is unclear whether there will be a need to amend the current law. The reason that vapes are illegal in the first place is because nicotine is one of the restricted products under the Poisons Act 1952," he wrote.

However, he said BAT's proposed foray into the vape industry was very positive. 

"The group estimated that there are at least 1 million Malaysians who regularly vape, which is circa 20% of the number of smokers in the country. We postulate that many of these are former cigarette smokers, who have either been put off by the exorbitant prices or concerned about the health hazards from combustion-based cigarettes.  

"There is also a growing number of young-adult vapers who have never even smoked a cigarette, deterred by decades of cigarette stigmatisation," he wrote.

Turning to its results for the third quarter ended Sept 30, 2020 (3QFY20), he noted that the group's margins, which now stand at 25.9% versus an average of 29.2% from 1QFY18 to 3QFY20, were being eaten by value-for-money (VFM) cigarettes, which now command a 26% market share from a negligible percentage just a few years ago.

"The silver lining from this is that BAT said its premium cigarettes’ market share has continued to stay at the 55%-mark. Hence, much of the down-trading must come from the mid-tier segment. BAT plans to re-deploy its operating expenditure savings to do more marketing for Dunhill and its new VFM cigarettes, Kyo, with more activities to be launched in FY21F, in order to attenuate the squeezed margins," he wrote.

To recap, BAT announced that its 3QFY20 net profit was RM63.74 million, which was up 16.72% from the RM54.61 million posted in the immediate preceding quarter (2QFY20), while revenue increased 14.81% in the same period to RM627.52 million.

When compared to the corresponding quarter in the previous financial year, BAT's 3QFY20 net profit fell by 23.32% to RM63.74 million from RM83.13 million in 3QFY19.

9MFY20 net profit was down by 31.8% year-on-year (y-o-y) at RM169.12 million from RM248 million. Revenue for the nine months was down 10.34% y-o-y at RM1.66 billion from RM1.85 billion.

"We believe BAT has a better chance now of appealing to lapsed and new customers with its imminent entry into the burgeoning vape market. However, we maintain our FY20-22F forecasts as it is still too early to factor in vapes’ contribution," said Kamarul, adding that it is keeping its "add" call and target price of RM12.65.

Its FY21 to FY22F yields range from 7.3% to 8.1%, backed by the group’s commitment to pay out at least 90% of its reported net profit.

“The upside risks include more effective enforcement against cigarette smuggling and a speedy launch of its Vuse vape products. While the downside risks are more down-trading and smuggled cigarettes’ supply replenishing on the black mark,” added CGS-CIMB.

At 3.13pm, shares in BAT fell eight sen or 0.71% to RM11.18, bringing its market capitalisation to RM3.21 billion.

Lam Jian Wyn