KUALA LUMPUR (April 27): CIMB IB Research maintains its "reduce" rating on British American Tobacco (Malaysia) Bhd (BAT) at RM54.50 with a lower target price of RM51 (from RM55.50) after the company's first quarter earnings of RM175.5 million underperformed market and the research house's year-on-year expectations by 27.9%.

In a note yesterday, CIMB said that with one out of every two cigarettes in the street thought to be contraband, total industry volume (TIV) for the month has declined a sharp 29.7% with BAT's sales declining 34.1%.

This is attributed to consumers finding cheaper alternatives on the back of the unprecedented excise duty hike on Nov 15, 2015, which helped pushed contraband volumes in Malaysia to 45.6%, the highest in the world.

BAT will cease all manufacturing operations in Malaysia by end-CY17. However, CIMB says the restructuring is likely to be positive in the long term, given the decline in overall volumes becoming a trend.

Instead, it will focus on retailing sourced products from other British American Group factories within the region.

CIMB says it expects the positive impact of restructuring activities to be seen only in 2018. Meanwhile, BAT's earnings are likely to be volatile due to various on-off costs until end-CY17 and the research house suggests investors switch from tobacco to brewers for more consistent dividend yields.