Minimal impact on BAT Malaysia for tobacco ban, says HLIB Research

KUALA LUMPUR: The earnings impact from the implementation of the Generational End Game policy on British American Tobacco (Malaysia) Bhd (BAT) will be mild in the early stages, said Hong Leong Investment Bank Bhd (HLIB Research).

The bank-backed research firm said BAT has been cautiously optimistic about its prospects on the back of recovering cigarette sales in Malaysia in the endemic phase.

The firm said that while the Generational End Game was revised to apply to people born after 2007, BAT still believes such a ban will be counterproductive and ultimately fuel the illicit market.

"Nevertheless, we note that the earnings impact of implementing the generational endgame will be mild in the early stage.

"This will probably take years to be reflected as people born in 2007 will only become 18 years old by 2025, and 18-21-year-old smokers accounted for less than five per cent of the group sales," it said.

On Feb 17, Minister of Health Khairy Jamaluddin announced that Malaysia would introduce a bold new law to ban smoking and possession of tobacco products, including vape, for people born after 2005, as part of a Generational End Game for smoking in the country.

He had first raised the prospect of introducing the law during an address at a World Health Organization (WHO) meeting in Geneva last month.

Meanwhile, HLIB Research also said the high inflation environment had put BAT's margin under pressure owing to higher input costs and consumer down-trading activities.

The firm said increasing the average selling price (ASP) is deemed the least preferred option for tobacco players, considering the high price difference between legal cigarettes (RM12-17) and illicits (RM3-9).

"On the other hand, the uptick in living costs due to the buoyant inflation has resulted in consumers down-trading, both from premium to aspirational premium (AP) and from AP to value-for-money (VFM).

"We gather that the combination of higher living costs coupled with the reopening of the international borders might lead to a higher illicit cigarette market share in the second half of 2022 (2H22)," it said.

HLIB Research has maintained a Hold call on the stock with a target price of RM11.13.

"Despite the company's outlook being clouded by the sector's high regulatory risk, the current 12.0 times financial year 2023 (FY23) price per earning (P/E) seems palatable," the research firm added.