Opportunity for BAT to unlock land value

PETALING JAYA: British American Tobacco (M) Bhd’s (BAT) shutting down of its facility here will help pave the way for the cigarette-maker to unlock the value of its land. The disposal marks a significant shift in strategy for the group’s operations in Malaysia, analyst reports said.

The exercise will be carried out in stages and is targeted to complete by the second half of 2017 and will affect 23%, or 230, or its 1,000 employees, according to reports.

The lot measuring 11.6 acres was last revalued in 1961 and has a net book value of RM57.48mil (or RM114 per sq ft), AmInvestment Bank said.

“Based on our channel checks and recent transaction price for land deals in the area, the price per sq ft ranges from RM350 for industrial land to RM500 for those approved for commercial use.”

The research house noted that BAT’s factory utilisation has been under pressure given the continuous contraction in legal total industry volume over the past decade.

“In an attempt to lower its operating leverage, the group had turned to contract manufacturing. This had worked back in 2012 to 2013 but export volumes soon declined due to weaker global demand for cigarettes and reallocation of volumes among BAT’s global facilities. More interestingly, we highlighted that BAT had stated its intention to sell the land on which the facility is located as well as all factory equipment and machinery – the former via a public tender exercise to be launched post the announcement and closing around May 2016, while the latter will be a transaction with BAT’s London-listed parent, British American Tobacco Group’s (BATG) units.”

BAT announced that the it is ceasing all its factory operations in Malaysia by the second half of 2017.

Its facility at Petaling Jaya has been catering to both primary (leaf processing) as well as secondary manufacturing (cigarette making) activities for more than 100 years.

BAT will obtain its tobacco products from the regional factories of BATG moving forward. BATG has 44 factories in 41 countries, with the nearest being Indonesia, Vietnam, Sri Lanka and Bangladesh.

“BAT attributes its decision to the difficult domestic operating environment brought about by the continued growth in the illicit trade (reported to be 42% as at December 2015).”

Kenanga Research said the move was positive, but while it protected the company’s interests in today’s challenging business environment, the move was also indirectly sending a negative message.

It reaffirms Kenanga Research’s bearish and pessimistic view on the outlook of local tobacco sector, which has been severely dented by the high excise duty structure and significant illicit trade.

“Looking forward, volume growth is expected to be soft with the latest round of price increase. We do not think that another price increase is likely on the expiry of Anti-Profiteering Act in June 2016 in view of the fragile sentiment and threat of illicit trades.”

Hong Leong Investment Bank said it was surprised by the marked shift in business strategy. “The group cites that the high excise environment has led to a sharp rise in illicit cigarettes, resulting in significantly lower sales volume. Volumes has contracted 24.16% since 2011 (2011: 8.75bil sticks vs 2015: 6.636bil sticks).

The disposal would theoretically yield a potential disposal gain of about RM94mil to RM195mil, or 33 to 68 sen per share assuming the complex is disposed in its entirety, HLIB said.