British American Tobacco (Malaysia) Berhad

$BAT / 4162 (BRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD)
Research by CGSI

$BAT / 4162 (BRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD)

$BAT / 4162 (BRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD)
Research by HLIB
CEASED – TP RM N.A

" Numbers in line”

BAT's 2Q24 core PAT of RM35.6m (+10.3% QoQ, -27.1% YoY) brought its 1H24 sum to RM67.8m, which came in within our expectation but below consensus forecast. We believe the shrinking combustible tobacco market in Malaysia, driven by the growing prevalence of e-cigarette products and declining smoking rates, is set to persist and weigh on BAT's sales outlook. Due to a lack of institutional investor interest and the reallocation of our internal resources, we cease coverage on BAT. Our previous forecasts, call, and target price should no longer be used as a reference going forward.

Analyst:
Sam Jun Kit
jksam@hlib.hongleong.com.my

$BAT / 4162 (BRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD)
Research by CGS
ADD – TP RM9.77

" 2Q24 earnings improvement a good sign"

■ BAT’s 2QFY24 core net profit of RM36.2m led to 1HFY24 core net profit coming in below our/Bloomberg consensus’ estimates at 35%/39%.
■ Improved economic activity and migration away from combustible products will help to support BAT’s earnings decline throughout FY24F, in our view.
■ Reiterate Add with unchanged GGM-based TP of RM9.77. At 10.6x FY26F P/E, valuations are undemanding, supported by FY24-26F yields of 8-9%

Analyst:
LEW Cheng Wei
chengwei.lew@cgsi.com

Prem JEARAJASINGAM
prem.jearajasingam@cgsi.com

$BAT / 4162 (BRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD)

KUALA LUMPUR: Hong Leong Investment Bank (HLIB) research recommends that investors “sell” their shares in  British American Tobacco (Malaysia) Bhd (BAT) amid a shrinking combustible tobacco market and growing vape product market in Malaysia.

© New Straits Times Press (M) Bhd

KUALA LUMPUR: British American Tobacco (Malaysia) Bhd (BAT Malaysia) saw its net profit fall 25.6 per cent year-on-year (YoY) to RM30 million in the first quarter ended Mar 31, 2024 (Q1 2024) versus RM40.32 million in Q1 2023 mainly due to higher operating expenses with ongoing investments in the vapour business.

© New Straits Times Press (M) Bhd

$BAT / 4162 (BRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD)
Research by HLIB
Sell (from Hold) – TP RM6.47

“A weak start"

BAT’s 1Q24 core PAT of RM32.3m (-29.2% QoQ, -20.9% YoY) missed both our and consensus expectations, accounting for only 15% of full-year forecast. Sales saw a significant 35.2% QoQ decline due to a drop in market share and a rise in illici market share. Additionally, the down-trading trends that led to lower sales in Premium and AP brands further pressured the group’s margins. In anticipation of a shrinking combustible cigarette market amidst the growing prevalence of vape products, we have cut our FY24f and FY25f earnings by 30% and 34%, respectively. Consequently, we downgrade the stock to SELL rating with a lower target price of RM6.47 (WACC: 9.5%; TG: 0.0%).

Analyst:
Sam Jun Kit
jksam@hlib.hongleong.com.my

BAT - Notice of Book Closure

Quarterly rpt on consolidated results for the financial period ended 31/03/2024

Interim Dividend

@jiaming8yap I think you miss the illegal cigarettes market, which form a big slice in the pie

FYI, the revenue erosion of BAT since 2016 is due to the expansion of illegal cigarettes. If I remember correctly, 50% of the total cigarette market in Malaysia is captured by illegal cigarettes. This rendered the brand ranking (i.e. no.1, no.2) irrelevant since the ranking can't consider the illegal cigarettes due to the lack of data

Why illegal cigarettes can be so strong? generally, it is the high tax imposed on legal cigarettes; specifically, there are hanky-panky behind the scenes, if you know you know

story:
BAT's traditional cigarettes segment are already mature and shall remain stagnant unless the government effectively regulates the illegal cigarettes industry or reduces the tax on legal cigarettes. Both are pretty unlikely.

$BAT / 4162 (BRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD) 's growth story focuses on the new e-cigarettes segment pioneer by its Vuse brand. However, this segment face intense competition from other brands such as Relx (China), Philip Morris (Malboro & IQOS), Mevius (Japan). On top of that, there are illegal e-cigarettes too, which tend to be cheaper than its legal counterpart.

Additionally, assuming one is not a smoker, and don't have any channel to access to the latest development in the cigarette industry, it will be hard for the one to evaluate the customers experience and competitive strength of BAT.

Given the unpredictability, I don't know how to evaluate BAT and will move on to other investment opportunities I know how to evaluate

Bet for $BAT / 4162 (BRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD): an opportunity for Cigar Butt Investing?
- FY 2023 Total revenue for BAT Malaysia declined by 11% to RM2.31 billion compared to RM2.60 billion in 2022. The decrease was mainly due to a volume decrease of 12.9% when compared to 2022 as a result of the contraction of the legal industry as well as the Group’s market share decline.
- Gross profit margin declined by 1.5% from 26.1% (RM678 million) in 2022 to 24.6% (RM568 million in 2023) owing mainly to lower margins from New Categories.
- However, BAT Malaysia Group remained committed to paying dividends at a level above 90% of its earnings.
- In 2023, They declared four quarterly interim dividends amounting to 63 sen per share, thereby maintaining a dividend payout ratio of 92%, which roughly translate to DY 7% based on current share price.

Product & Business Overview Performance:
- They currently offer high-quality tobacco brands such as Dunhill, Peter Stuyvesant, Rothmans, KYO, Luckies, tobacco heating products such as glo™ and vapour products such as Vuse.
- Their current strategy: focusing on their New Category products, fuelled by investment from the continued delivery of the traditional tobacco business/ combustibles.
- BAT Malaysia Group’s total market share was 0.5% lower in 2023, mainly attributed to the delisting of the Kent and Pall Mall brands during 2022 as well as the impact of continued downtrading.
- Dunhill continues to maintain its unrivalled No.1 position in Malaysia, with more than double the share of the second biggest brand in the market.
- Despite facing segment challenges, premium and aspirational premium portfolio continues to perform well.
- The Group’s Value-for-Money (VFM) brands, Luckies and Rothmans, are showing a strong performance. Their VFM portfolio remained a key growth driver in 2023, registering Share of Market (SOM) increase by 1.7% compared to the previous year.
- Rothmans continues to spearhead BAT Malaysia’s growth in the VFM segment, achieving a double-digit market share for the first time in August at 10.1%. Additionally, with a 1.6% growth in its segment share, Rothmans has established itself as the third-largest legal brand in Malaysia.
- In Q3 2023, BAT Malaysia launched a new brand in August, Luckies, with 2 SKUs, to bolster growth in the VFM segment.
- Premium Segment - The Peter Stuyvesant brand maintains stable share performance of a growth in share of segment by 2 percentage points (ppt), despite the implementation of a price increase of RM0.30 in Q3 2023.
- They also developed New Categories of reduced-risk* alternatives to smoking. The revenue contribution from New Categories was not material as the Group only entered into New Categories in the latter half of 2023.
- Non-combustible portfolio: flagship vape brand, Vuse - #1 Global Vaping brand at over 6,600 convenience stores and vape specialist outlets throughout Malaysia and from authorised online store on Lazada.

Cost optimisation and operational updates:
- Recent transition to a new warehouse, increasing from 40,000 square feet to 64,000 square feet.
- Optimising transportation strategy by introducing a "Milk Run" approach, streamlining delivery process and reducing transportation costs, among others.
- Implemented Packaging Optimisation Initiatives – RM1.5 million Annualised Savings

Challenges:
- Economic headwinds and continued inflationary pressures that reduced the disposable income of consumers. Consumers then downtrade or choose alternative nicotine products such as vapour.
- Lower industry volume in the combustible space driven by the increase in vapour usage as well as the persistent tobacco black market. The tobacco black market, currently still at 55.6% (the tobacco black market results in an annual loss of RM5 billion for Malaysia due to uncollected taxes).

IMO, I wouldn't have bat an eye for them if it weren't for their high DY and share price movement because I'm not a smoker (neither do I encourage it).

😶

General Meetings: Outcome of Meeting

$BAT / 4162 (BRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD)
Research by CGS
Add (previously Hold) – TP RM9.77

“Bottoming earnings with good yields"

■ We resume coverage on BAT with an Add rating and a lower GGM-based TP of RM9.77. BAT’s earnings should bottom in FY24F, in our view.
■ We believe BAT’s investments in and launching of its own vape brand, Vuse, in 3Q23 should help its earnings turn around from FY25F onwards.
■ At 10.8x FY26F P/E, valuations are undemanding, supported by FY24-26F yields of 8-9%. This note marks the transfer of coverage to Lew Cheng Wei.

Analysts:
LEW Cheng Wei
chengwei.lew@cgsi.com
Prem JEARAJASINGAM
prem.jearajasingam@cgsi.com

General Meetings: Notice of Meeting

Annual Report & CG Report - 2023

Circular to Shareholders in Relation to Proposed Renewal of Shareholders' Mandate for British American Tobacco (Malaysia) Berhad and its Subsidiaries to enter into Recurrent Related Parties Transactions of a Revenue or Trading Nature with Related Parties

TRANSACTIONS (CHAPTER 10 OF LISTING REQUIREMENTS) : RECURRENT RELATED PARTY TRANSACTIONSBRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD ("Company")

Proposed Renewal of Shareholders' Mandate for Recurrent Related Party Transactions of a Revenue or Trading Nature with Related Parties ("Proposed Renewal of the Recurrent RPT Mandate")

The earnings outlook for British American Tobacco (M) Bhd (BAT) remains challenging over the medium term due to its lack of robust income streams from new segments amid pressure on its traditional combustible cigarette segment.

$BAT / 4162 (BRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD)
Research by HLIB
Hold (Maintain) -TP of RM9.22

"Dust has yet to settle"

Impacted by ongoing down trading activities and less competitive price points compared to its peers, BAT experienced a significant decline in sales volume for FY23 which dropped by 12.9% vis-à-vis the legal industry's modest 1-ppt decrease. In response to the down trading trend in the combustible cigarette market, BAT has introduced a new value-for-money brand called Luckies to safeguard its market share. Meanwhile, the Vuse brand has shown impressive performance, capturing a strong market share despite being a late entrant to Malaysia’s fragmanted vape space. However, Vuse's contribution to the group remains negligible, accounting for less than 2% of the group's sales. Consequently, we are keeping earnings forecast unchanged. We maintain HOLD call with an unchanged TP of RM9.22.

Analyst:
Sam Jun Kit
jksam@hlib.hongleong.com.my

$BAT / 4162 (BRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD)

$BAT / 4162 (BRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD)
Research by HLIB
Hold (Maintain) - TP of RM9.22

"Lower sales volume"

BAT’s FY23 core PAT of RM193.1m (-31.5% YoY) was within ours but below consensus forecasts, accounting for 95% and 93% of full-year forecasts, respectively. Notably, despite a 1% decline in illicit market share, legal combustible volume for FY23 experienced a decline as the returned volume shifted towards the e-cigarette category. We anticipate this trend to persist, potentially limiting BAT’s combustible cigarette sales rebound if the illicit market share, currently at 55.6%, regains traction. Given the lack of robust earnings streams from new segments to fill the void left by the combustible cigarette segment, we opine that BAT’s earnings outlook remains challenging. We maintain HOLD recommendation with an unchanged TP of RM9.22 (WACC: 9.5%; TG:
0.0%).

Analyst:
Sam Jun Kit
jksam@hlib.hongleong.com.my

KUALA LUMPUR: British American Tobacco (M) Bhd’s (BAT) earnings outlook is expected to remain challenging due to the lack of robust earnings streams from new segments.

© New Straits Times Press (M) Bhd

BAT - Notice of Book Closure

British American Tobacco (M) Bhd (BAT) is cautiously optimistic of achieving an improved financial performance for the coming year, on the back of the country’s improving economic momentum in 2024.

PETALING JAYA: British American Tobacco (M) Bhd (BAT) is cautiously optimistic of achieving an improved financial performance for the coming year, on the back of the country’s improving economic momentum in 2024.

Interim Dividend

Quarterly rpt on consolidated results for the financial period ended 31/12/2023

Change in Nomination and Remuneration Committee - TAN SRI DATO' SERI DR ASEH BIN HAJI CHE MAT