KUALA LUMPUR (May 30): British American Tobacco (Malaysia) Bhd (BAT Malaysia) emerged as the top loser on Monday morning (May 30), falling as much as 58 sen or 4.54% to RM12.20, after its net profit for the first quarter ended March 31, 2022 (1QFY22) missed analysts' expectations.
The counter had pared some losses at 10.05am, still down 42 sen or 3.29%. It saw 113,400 shares traded.
BAT Malaysia announced last Friday that its net profit for 1QFY22 slipped 17.15% to RM52.29 million, from RM63.11 million a year ago, as revenue slid 7.94% to RM521.56 million from RM566.55 million. The group declared an interim dividend of 17 sen.
Affin Hwang Investment Bank analysts Shahira Abdul Rahim and Damia Othman in a note on Monday downgraded BAT Malaysia to "sell" from "hold" and revised down their target price (TP) to RM10.70 from RM12.34 as they cut their FY22 to FY24 earnings estimates by 21% to 25% on expectations of an uncertain market and after increasing their expense assumptions.
“BAT Malaysia’s 1QFY22 core net profit of RM48.3 million (-15.4% year-on-year [y-o-y]; -52.1% quarter-on-quarter [q-o-q]) was below our and the consensus full-year estimates,” they said.
According to them, the earnings downgrade was made after taking into consideration a drop in market share despite the reopening of economic activities, uncertainty faced by the sector with regard to the status of legalising tobacco vapour products and the potential ban of tobacco for those born after 2005.
BAT Malaysia underperformed the legal industry, registering a lower market share of 51.9% (-0.5 percentage point y-o-y).
Hong Leong Investment Bank analyst Chua Siu Li also in a note on Monday reduced her earnings forecasts for BAT Malaysia for FY23/24 by 14%/13% as she incorporated lower revenue assumptions to reflect weaker sales volumes.
“BAT Malaysia’ s 1QFY22 core profit after tax of RM56 million (-28.8% q-o-q; -12.5% y-o-y) missed expectations, forming only 19% of both our and the consensus full-year forecasts respectively. The negative surprise was due to lower sales arising from high illicit cigarette activities, as well as a shift in purchasing habits during the quarter,” she said.
While reiterating a "hold" call on BAT Malaysia, she lowered her TP to RM12.04 from RM12.14.
According to her, the Tobacco and Smoking Control Bill is currently being finalised, and is expected to be tabled in Parliament in July by Health Minister Khairy Jamaluddin.
“The intention of the Bill is to restrict the sale of cigarettes to individuals born after 2005. We note that the Ministry of Health is also currently studying the viability of implementing a tobacco product display ban to end the smoking habit.
“That said, we are of the view that overregulation could potentially fuel illicit cigarette sales as affected consumers will turn to the black market instead,” she said.
Meanwhile, CGS-CIMB analyst Kamarul Anwar in a note on Monday cut his FY22 earnings per share forecast by 5% for BAT Malaysia after factoring in the prosperity tax’s impact.
“BAT Malaysia’s 1QFY22 core net profit made up 21% of our FY22 forecast. It was below our expectations because the effective tax rate was higher than expected,” he said.
He believes the group will once again face a y-o-y sales decline as seen before the Covid-19 pandemic, although not to the extent of 1QFY22’s 7.9% drop.
“In our view, Malaysia’s regulatory framework is working against the tobacco industry’s efforts to grow sales,” he said.
While reiterating his "reduce" call on BAT Malaysia, he also cut his TP to RM8.77 from RM10.53.
Likewise, Kenanga Research analyst Pritika Modhgil in a note on Monday reduced her FY22/FY23 earnings forecasts by 3%/6% for BAT Malaysia to account for the potential rise in black market cigarettes, which would negatively impact sales moving forward.
“BAT Malaysia’s 1QFY22 results came in below expectations, affected by a rise in Omicron cases which resulted in consumption contraction. With borders reopened in 2QFY22, this may [also] pose a threat to the group’s earnings as contraband cigarettes may potentially flood the market.
“Moreover, we expect further challenges ahead given the proposal to ban all kinds of cigarette products to those born after 2005, plus renewed illicit activities in the aftermath of the proposed ban,” she said.
However, she maintained the stock as "outperform" on account of its consistent enticing dividend yield of 7%.
She also revised her TP to RM13.40 (from RM13.10).