Illicit cigarettes, vape clouding BAT's near-term outlook

KUALA LUMPUR: Affin Hwang Capital research expects an uncertain near-term outlook for British American Tobacco Bhd due to the second wave of vape products and the increase in fake tax stamps in the market. 

The research house downgraded the stock to a hold from buy with a lower target price of RM30 from RM39.70 previously.

In its earnings results, BAT's 1H19 core net profit of RM165mil came to only 36% and 37% of Affin HWang's and consensus full-year estimates.

"Despite a sequential improvement in 2Q19 sales volume (+4% qoq) led by higher sales of value-for-money (VFM) Rothmans following a well-received marketing drive, margins declined 2.6ppts qoq due to A&P for the aforementioned.

" This is in addition to an upswing in investment spend on a public campaign against the illicit trade, timing difference in spending, as well as pre-launch costs for its heat-notburn (HNB) products, which have been approved for introduction in 4Q19," said the research house.

According to Affin HWang, there has been a rise in legal cigarettes sold under fake tax stamps leading to persistently high illicit trade while some somker have contemplated converting to vape products. 

"The resurgence in interest arose from the increasingly widespread availability of improved next-generation devices whose nicotine-based refills are prohibited, but are nonetheless still sold through online stores and in numerous vape shops at more affordable prices," it said.