KUALA LUMPUR (June 1): British American Tobacco (Malaysia) Bhd (BAT Malaysia)’s share price dropped today despite a 24.32% year-on-year (y-o-y) increase in net profit to RM63.11 million in the first quarter ended March 31, 2021 (1QFY21), and declaring a dividend of 21 sen.

Analysts hold mixed opinions on BAT Malaysia’s outlook due to the volatile nature of the tobacco market and an expected decrease in market volume.

In a note today, CGS-CIMB downgraded its “add” call to “hold” with a target price of RM15.40, attributing these changes to the quarter-on-quarter (q-o-q) drop in net profit and an expected decrease in market volume.

“BAT’s 1QFY21 core net profit regressed 18.8% q-o-q, after coming off the year-end holiday season. The quarter’s sales, however, dropped by a milder rate of 14.2% q-o-q. Part of the reason its 1QFY21 core net profit fell worse than the topline was the 1.3%-pt dilution in its gross margin, from 26.5% in 4QFY20 to 25.2%.

“However, our view is BAT Malaysia cannot simply expect the volume bulge to continue expanding. Ultimately, Malaysia’s legal cigarettes are expensive for a large segment of smokers. Sooner or later, this gravy train will run out of steam,” said analyst Kamarul Anwar.

Along the same lines, Hong Leong Investment Bank had downgraded its “hold” call to “sell” and maintained its target price (TP) of RM11.75, citing that BAT Malaysia’s share price had previously risen to an unjustified level given the earnings uncertainty.

“Higher y-o-y revenue (+17.8%) was due to growth in overall industry sales volumes (+19%). BAT Malaysia shared that higher sales volumes may be due to measures introduced in Budget 2021, which included stricter tobacco transhipment regulations to counter black market activity.

“While earnings were in line with our forecasts, we reckon BAT Malaysia’s share price has risen to an unjustified level given the earnings uncertainty from chronic high illegal market share, growth in unregulated vape products and consumers down trading to value-for-money (VFM) brands,” said analyst Gan Huan Wen.

Meanwhile, Kenanga Research upgraded its call to “market perform” (previously “underperform”), with a TP of RM14.80.

Analyst Ahmad Ramzani Ramli said BAT Malaysia’s 1QFY21 results were in line with the research house’s expectations, and good progress can be seen from measures introduced in Budget 2021 to control contrabands.

“In spite of the Budget 2021 being a positive one for BAT Malaysia with more stringent measures imposed to curb rampant contraband cigarettes, we believe the key matter lies in execution and any meaningful recovery for the stock would only materialise with a sustained clampdown on the illegal cigarettes.

“Moving forward, we reiterate our view that the group’s outlook should continue to be clouded by the rampant illicit tobacco issue, with signs indicating such syndicates changing their modus operandi to circumvent the measures introduced in Budget 2021.

“However, growth will be sustainable ahead given its introduction of less risky products to consumers, progressive regulation on vape products and strengthening of its VFM products,” Ahmad said.

At 12:30pm, BAT Malaysia’s share price dropped 88 sen or 5.58% to RM14.88, giving it a market capitalisation of RM4.25 billion.

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