KUALA LUMPUR (Dec 20): Hong Leong Investment Bank (HLIB) Research has upgraded British American Tobacco (M) Bhd (BAT) to “Hold” at RM14.94 with a lower discounter-cash-flow (DCF) derived target price of RM15.28 (previously RM16) due to the uncertainty of the company’s future earnings.
In a note today, HLIB Research stated that it sees glo, a tobacco heating product (THP) launched by BAT, as a viable product offering for Malaysian consumers and that it will take some time and marketing investment for it to have a significant impact on earnings.
Glo was launched by BAT in response to IQOS which was launched by Phillip Morris International (PMI) in late 2018. Currently, glo is retailing for RM100, lower than the retail prices for PMI’s IQOS which retails for more than RM169.
“BAT shared the significantly lower retail price represents ‘marketing investment’ in the glo, which we reckon is necessary given IQOS’s head start in the THP market and high initial start-up cost for conventional smokers switching to THP,” it said.
It further noted that in other major THP markets, the launch of glo lagged IQOS by six to 18 months resulting the latter seizing first mover advantage.
According to the research house, given the relatively high cost of refills for glo, called neo, (RM14 [inclusive excise duty of RM4] versus less than RM5 for illicit tobacco), it does not see glo eating into the chronic illicit tobacco market share, which has now risen to 65% of the total smoking market.
Additionally, rising cost of living is fuelling the growth of value-for-money brand Rothman’s (RM12.40 shelf price) at the expense of premium brand Dunhill (RM17.40 shelf price) resulting in significant margin pressure.
“Since its launch in end-FY17, Rothmans has grown to 5.2% of the total legal market volumes (approximately 14% of BAT’s total volume),” HLIB said.
Plunging earnings has resulted in BAT announcing they intend to reduce 20% of their total head count, which should offer temporary reprieve for the group in facing unwavering negative macro factors.
HLIB has tweaked its DCF valuation metrics from (WACC: 9.2%, TG: 2.5%) to (WACC: 9.5%, TG: 2.5%).
At 9.20am, BAT shed 0.40% or 6 sen to RM14.88, valuing it at RM4.35 billion.