Smoke-free zones could be a challenge to tobacco industry volume

KUALA LUMPUR: Government efforts to crack down on illegal cigarettes and a concomitant initiative to to establish smoke-free zones by January 2019 could be a zero-sum scenario for the tobacco industry.

In its report on British American Tobacco (M) Bhd, Kenanga Research said the implementation of smoke-free zones could pose a challenge to industry volume. 

FUrthermore, it maintains its cautious view of the overall tobacco industry given that alarming levels of illegal products persist, undermining the effectiveness of efforts taken by the authorities.

The research house maintained its underperform rating on BAT with a higher target price of RM29.10 from RM28.25 previously.

Kenanga also noted that BAT and certain tobacco players retracted their Sales and Service Tax (SST)-led price of 50 sen a pack in late-September pending guidence from the Health Ministry. 

Post-Budget 2019, these tobacco companies implemented a minimum increase of 40 sen a pack.

During the period prior to the Health Ministry's guidance, BAT said it would absorb the cost of charging cigarettes at pre-SST levels.

"Our volume assumptions indicate an expected pullback of less than RM30mil from this. Still, the margin gains during the 'tax-holiday' between June-August 2018 could provide some
leeway in managing this cost," said Kenanga.

Following Budget 2019, premium brands are priced at RM17.40, aspirational premium brands at RM15.90 and value-for-money at RM12.40. The adjustment appears to be uniform across BAT’s peers.