KUALA LUMPUR: British American Tobacco (Malaysia) Bhd's (BAT) sales outlook is likely to continue declining due to the fragmented nature of the vape market.
Hong Leong Investment Bank Bhd (HLIB Research) said the growing usage of vape products directly impacted BAT's sales of traditional combustible cigarettes, which dragged its profit after tax (PAT) down 27.1 per cent.
In the second quarter of its financial year 2024 (2QFY24), BAT's revenue was at RM640 million, 5.6 per cent lower versus RM678 million registered in the same quarter last year.
Its net profit declined 23.7 per cent to RM36.28 million from RM47.5 million previously.
Although the group introduced its vapour products Vuse in the financial year 2023 (FY23), HLIB said the sales void continues to widen due to the fragmented nature of the vape market.
"Unlike the traditional combustible cigarette market, which is dominated by only three players in Malaysia, the vape market is highly fragmented with over 100 brands and more than 1,500 SKUs.
"The expansion of the vape market at the expense of traditional cigarette market share has led to a dispersion of sales among multiple vape brand owners, thereby putting pressure on BAT's sales performance," it said in a research report today.
The research firm also noted that BAT's margin is under pressure amid the ongoing downtrading trend and the shifting impact to vape products.
It highlighted that the margin of vape products is similar to that in the VFM segment of combustible cigarettes, which is perceived to have the lowest margin among all segments.
Meanwhile, CIMB Securities Sdn Bhd said Vuse's small range of flavours and less preferrable formats versus its peers caused its sales growth to be slower than expected.
However, the research firm said the company is still in the process of refining its strategy, such as more formats and more flavours to enhance its Vuse's market penetration in Malaysia.
"With the vape market estimated at approximately RM3.5 billion in Malaysia (according to Malaysian Vape Industry Research 2023), we believe there remains significant upside for BAT to capture more market share in this segment, leveraging on its strong brand equity and potential tailwind from favourable regulatory developments," it said.
CIMB Securities maintains its "hold" call on BAT's stock with a lower target price of RM8.45 from RM8.80.
The firm trimmed its earnings estimates for FY24-FY26 by 12 per cent to 20 per cent, to account for lower sales estimates from Vuse products.
On the other hand, HLIB ceased coverage of BAT as it believes the group's outlook faces a structural decline while investor interest is lacking.
"Our previous forecasts, call, and target price should no longer be used as a reference going forward," it said.