BAT recorded a worse-than-expected contraction in product volume over the first quarter, which was down 18% year-on-year (y-o-y) and 24% lower quarter-on-quarter (q-o-q).
"Weaker purchasing power caused by a disrupted economy may very well exacerbate the issue of affordability, and divert smokers to illicit cigarettes (currently taking up c. 69% of market share)," said the research house.
It added that the illicit cigarette market have proved more resilient than expected, and even made inroads despite the MCO.
BAT's 1QFY20 revenue fell 22.5% y-o-y as it faced downward pressure on product volume due to the shrinking legal market and demand growth in illegal vaping.
The group's duty free business, which contributes about 4% to total revenue, was also heavily impacted by the fall in passenger traffic during the pandemic outbreak.
Core net profit fell 37.9% to RM55mil on a poorer product mix as smoker traded down to lower-margin value-for-money products such as Rothmans. The earnings missed both Kenanga's and consensus expectations at 16% and 17% of their respective full-year estimates.
The declared dividend of 17 sen per share also missed expectations in line with the weaker earnings.
Kenanga downgraded BAT to underperform and reduced its target price to RM10.05 from RM15.50 previously.
"Post-results, we slashed our FY20E and FY21E earnings by -35.1% and -32.1%, respectively, as we take into account the dwindling sales volume," it said.