KUALA LUMPUR (Oct 23): British American Tobacco (Malaysia) Bhd (BAT Malaysia), which posted a 32.7% year-on-year decline in third-quarter net profit, said it remains concerned with legal volumes continuing to be impacted by the current high incidence of illegal cigarette trade.

"The outlook for the remaining period of 2017 and 2018 will be very much dependent on the recovery of the legal market," it said in a filing with Bursa Malaysia today.

It noted that illegal cigarettes incidence has increased to 56.1% as of August 2017 from 51% in 2016, driven by the price gap between legal and illegal cigarettes and current macroeconomic factors that are impacting consumer spending power.

"The challenge of the legal industry remains the pressure on the legal market size and BAT Malaysia's future outlook will be dependent on what initiatives are implemented to reduce illegal cigarette consumption," its managing director Erik Stoel said in a separate statement.

"Although we totally support more enforcement, we also know that enforcement alone will not fix the problem. A lot of critique from anti-smoking bodies was given, with the only real argument being that smoking is bad and should be further restricted and the industry is trying to make money out of this, and we should not be allowed to propose alternative solution to curb illegal cigarettes.

"We do not expect everybody to support smoking or like the tobacco industry. However, smoking is a legally allowed adult choice, we are a legal industry in Malaysia and as such we are allowed to exist, do business and we pay our taxes like any other legal industry. People who already made the choice to smoke will continue to smoke with or without the legal industry," he added.

BAT Malaysia saw its net profit fall to RM143.18 million in the third quarter ended Sept 30, 2017 (3QFY17) from RM212.62 million a year ago, on lower volumes, restructuring expenses and higher operating expenses.

Earnings per share was lower at 51 sen from 73 sen in 3QFY16. Quarterly revenue also dropped 18.8% to RM757.28 million in 3QFY17 from RM932.19 million in 3QFY16.

Nevertheless, the group declared a third interim dividend of 43 sen per share amounting to RM122.78 million for the financial year ending Dec 31, 2017 (FY17), payable on Nov 23.

BAT Malaysia said during 3QFY17, the group recorded restructuring expenses of RM2 million, which consisted of ongoing cost of the project and outplacement programmes.

Thus, in relation to the cessation of its manufacturing operations in Petaling Jaya, Selangor, the group has further recorded restructuring expenses of RM7.9 million as of Sept 30, 2017.

BAT Malaysia noted that it registered a market share decline to 53.9% in 3QFY17 from 54.5% in 2QFY17. Dunhill, the biggest premium brand in legal market, registered a 38.4% market share in 3QFY17, down 0.6% from 2QFY17.

It blamed the decline to the prevailing high level of illegal cigarette incidence at 56.1% as of August 2017, as well as the growth of a lower price segment within the legal market.

As a result, volumes decreased by 1.7% in 3QFY17 versus 2QFY17, translating into revenue and gross profit reduction of 2.2% and 1.8% respectively.

Operating expenses during 3QFY17 were also 6.9% higher than the preceding quarter, primarily due to the pre-spend on marketing investment committed behind Rothmans, which was launched in the first week of October.

However, the group's gross margin continued to improve for the third consecutive quarter, reaching 36.5% in 3QFY17, thanks to the full implementation of the group's sourcing change from local manufacturing to importation model.

For the cumulative nine months (9MFY17), BAT Malaysia's net profit fell 7.3% to RM401.49 million from RM432.95 million a year ago, while revenue declined 21% to RM2.3 billion from RM2.92 billion in 9MFY16.

BAT Malaysia said this was in line with volume decline and the cessation of contract manufacturing for exports as of Dec 31, 2016. This led to a gross profit deterioration of 18.8% or RM188 million versus 9MFY16.

Year to date, the group's domestic and duty free volumes has declined at 15.3% compared with the same period last year.

"Since the first half of 2017, the group's volumes have been on a recovery trend. However, this trend was interrupted in the third quarter of 2017, mainly due to the market dynamics within the illegal cigarettes segment and the recent growth of lower price segment within the legal market," said BAT Malaysia.

BAT Malaysia shares closed up 24 sen or 0.57% to RM42.60 today, bringing a market capitalisation of RM12.16 billion.