This article first appeared in The Edge Financial Daily, on July 27, 2016.

KUALA LUMPUR: The steep 40% excise duty hike last November has been singled out by British American Tobacco (M) Bhd (BAT) as the principal factor that caused its sales volume to contract 28.9% in the first half of this year, which resulted in a 78% year-on-year dive in earnings in the second quarter ended June 30, 2016 (2QFY16).

It was BAT’s sharpest quarterly earnings decline in at least nine years, according to Bloomberg data, as net profit came in at RM47.72 million, compared to RM219.35 million a year ago, as it lost market share to illegal cigarettes after the excise duty hike. Quarterly revenue shrank 11.51% to RM962.58 million, from RM1.09 billion.

Consequently, its year-to-date (1HFY16) earnings fell 52% to RM220.33 million, from RM461.09 million in the same period last year, according to BAT’s bourse filing.

Based on the first-half results, BAT said its full-year profit from operations in FY16 will likely be lower than in FY15. 

Aside from weaker revenue, the group also made a provision for restructuring expenses of RM86 million during the quarter under review, in relation to the winding down of its factory operations in Petaling Jaya, Selangor. 

Meanwhile, 1HFY16 revenue retreated 16.02% to RM1.98 billion, from RM2.36 billion in 1HFY15.

Going forward, the only listed cigarette company on Bursa Malaysia said it remains concerned that legal volumes will continue to be impacted by rampant illegal trade and consumer down-trading in the legal market. As such, it said the outlook for the rest of 2016 is dependent on the performance of the legal market.

The group also declared a second interim dividend of 45 sen, payable on Aug 25.

In a statement, BAT managing director Erik Stoel said total legal domestic market experienced a volume decline of 26.3% in the first half of 2016 (1H16). 

“Consequently, BAT saw a contraction in its domestic and duty-free volumes of 28.9%, versus the 1H15. Overall volume reduction and its consequent escalating cost pressures resulted in total revenue decline of 16% and gross profit of 21.5%, compared to1H15,” he said, adding that the industry has yet to see signs of recovery after the duty hike.