British American Tobacco (M) Bhd (BAT) believes 2005 net profit might be lower than the previous year as higher priced cigarettes and an ongoing price war on value brands impacts its financial prospects.
The amount of total dividends paid might also be lower than 2004, the company's top executive hinted.
Speaking after the company's AGM in Petaling Jaya yesterday, BAT managing director Andrew Gray said the volume of cigarettes sold by the industry in the first quarter was down 10% from the previous year but he forecast that total industry volume may shrink in the single-digit range by the year-end.
He estimates that total volume by the end of the year may contract by between 5% and 10%.
“There are two factors that have combined to make the outlook for the group's volume in 2005 negative. The first is the excise-led price increase in September 2004 and the second is the reduced price of value for money brands,'' Gray said in a statement.
“In response to aggressive new brand launch activity by the competition, BAT Malaysia was obliged to reduce the price of its value-for-money brands including Pall Mall and Perilly's in March. Although this may exacerbate the downtrading trend in the market, it was a necessary decision taken in order to maintain BAT Malaysia's leadership position in the Malaysian market.''
Downtrading refers to the switch to cheaper brands.
At the media briefing, Gray said profit would also be hit from the increased cost arising from the company's compliance with new regulations and the cessation of a RM53.3mil fee for the reservation of cigarette production capacity, which was reflected in its 2004 financial results.
While the industry feels the pinch of higher cigarette prices and from a price war, BAT said volume might shrink next year if the ban of small cigarette packs – packs with less than 20 sticks – is enforced. The ban was deferred to June 1 next year.
“That could happen. There are unintended consequences from such regulations,'' Gray said.
Small packs account for about a third of total sales. Costs may also rise next year as machinery used to make the small packs is converted to produce the 20-stick packs.
Gray said the dividend payout ratio as a percentage of net profit would remain but the payout amount would depend on the profitability of the company.
“This is being impacted by the decrease in volume,'' he said.
BAT paid RM709.3mil in dividends last year, about 90% of net profit. Although the company paid a special dividend in 2001 and 2003, it said it was unfair to extrapolate that and assume a special dividend would be paid in 2005 as such a payment would also depend on the company's profits.
Commenting on the price war, Gray, stressing that the company did not start it, said BAT nonetheless had to lower prices to protect its market share.
“Within reason, we will take all measures to maintain our position,'' he said, indicating that it may spend a bit more to defend its market share of the industry.
Gray ruled out introducing new value brands in the price war, saying that the company did not want to lose focus on its current portfolio.
An audit on the industry showed that BAT has a 63.5% share of the market. Its share, however, has declined marginally from the same period last year.
Gray said the performance of its Dunhill brand was pretty good in the first quarter with about a 40% share of the market.
He said Pall Mall showed good growth to see its share rise slightly above 6% and Kent's performance was stable with just over 1% share.
He said the company understood the reality of the downtrading scenario but intended to make its key brands, especially Dunhill, more resilient.
Gray said the company might commence an innovative marketing activity to maintain its market share.