KUALA LUMPUR: British American Tobacco
's 9M17 core net profit of RM417.5mil came in below Hong Leong Investment Bank Research and consensus estimates, accounting for 71.7% and 67.3% of full-year forecasts respectively.
In a research note on Tuesday, HLIB Research noted that BAT was playing catch-up in the low price range market with the introduction of the Rothman brand in the first week of October.
On a quarter-on-quarter basis, BAT's market share declined by 0.6 percentage points to 53.9% owing to the growing low price segment.
The Dunhill brand declined 0.6 percentage points q-o-q to 38.4% market share.
The Chesterfield brand by Philip Morris International, which was the first in the low price segment, commands about 4.5% of the market share in the segment.
"We can expect opex to increase moving forward as BAT invests heavily into this new segment (opex +6.9% q-o-q) partially offsetting the optimisation of its cost base transformation which has seen opex decrease by 17% year to date," said HLIB Research.
BAT is also under pressure from the illicit cigarette market. New illicits that feature fake tax stamps are distorting the estimated illicit market share, which has been cited as 56.1%, as they have not been accounted for.
BAT is in talks with the government to introduce 10-stick packs, but HLIB noted that it is neutral on this as the driver of demand for illicit cigarettes remains an affordability issue.
With illicit cigarettes continuing to have a high market share, the research firm has a negative outlook for the sector.
Given the assumptions of lower volume and higher opex moving forward, the research firm has cut its FY17-19 forecasts by 5%. It maintained its Hold call on BAT with a dicounted cash flow-derived target price of RM38.43, reduced from RM40.55.
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