This article first appeared in The Edge Financial Daily on November 1, 2019

KUALA LUMPUR: British American Tobacco (Malaysia) Bhd (BAT Malaysia), which said it is extremely concerned about the lack of progress on the reduction of illegal cigarette trade, saw its third-quarter earnings drop 42% year-on-year on lower volume.

Net profit for the quarter ended Sept 30, 2019 (3QFY19) fell to RM84.8 million from RM146.27 million a year ago. This resulted in a lower earnings per share of 29.1 sen for 3QFY19 compared with 51.1 sen for 3QFY18.

Quarterly revenue also came in 20.6% lower at RM584.34 million from RM735.53 million for 3QFY18.

The country’s largest tobacco company said the contraction in the legal tobacco market, as well as inventory adjustment from seasonal impact, led to the decline in its volume by 8% quarter-on-quarter (q-o-q) in 3QFY19.

Nevertheless, the group declared a third interim dividend of 29 sen per share totalling RM82.8 million for FY19, payable on Nov 26.

In a bourse filing yesterday, BAT Malaysia said overall volume in the legal industry contracted by 4% q-o-q in 3QFY19, due primarily to the increase in illegal cigarette trade, as well as the impact of vaping.

As a result, the group’s market share declined marginally by 0.4 percentage points (ppts) to 54.4%.

“The decline is mainly driven by premium and aspirational premium segment performance due to the continuous downtrading in the market; partly offset by Rothmans’ solid growth of 0.5ppt q-o-q.

The weaker quarterly performance dragged the group’s net profit for the cumulative nine months ended Sept 30, 2019 (9MFY19) down 29.8% to RM249.95 million from RM355.88 million a year ago, driven mainly by lower volume as a result of legal market contraction and the absence of one-off factors reported in the same period last year such as the benefit from the goods and services tax removal and prior year tax stamp refunds.

Revenue for 9MFY19 also declined 10% to RM1.85 billion from RM2.05 billion for 9MFY18.

“The current environment within the tobacco industry is one that is unsustainable and untenable for any legal company. While we continue in our commitment to deliver value to our shareholders, the results for this quarter [were] achieved on the back of conscious cost base and investment management,” BAT Malaysia managing director Erik Stoel said in a separate statement.

“The grim fact is that the current scenario of cheap illegal and contraband tobacco products has further deteriorated in Malaysia despite the efforts by law enforcement agencies like the police and the customs department to clamp down on the cartels running these syndicates. When are we going to realise that this is an issue that goes beyond tobacco duty evasion?”

Stoel said there is a need for more players like the ministry of health to clamp down on the inflow of cheap contraband cigarettes that do not comply with tobacco control laws into the country.

“We need a sustainable total nicotine regulatory and fiscal framework in order to build our business back into growth,” he added.