The share price of BAT closed 7.4% higher to RM10.98 yesterday, as investors expected the cigarette company to benefit from the budget.
RHB Research pointed out that the government has outlined the importance of improving revenue collection strategies by addressing the smuggling of high-duty goods.
“The government’s stance and action plan could be a turning point for the legal tobacco industry, ” it said in a report.
The diminishing legal total industry volume has been the result of unfair competition from illicit cigarettes and unregulated next-generation products.
“We believe cigarette transhipment is a key channel for illicit trade. The tightening of regulations, with the right execution, should close the loophole.
“Meanwhile, the imposition of an excise duty on next-generation products may imply the advent of a proper regulatory framework.
“This should level the playing field between conventional and next-generation products, and may pave the way for the legal players to introduce their own products, ” RHB added.
From Jan 1,2021, the government will be implementing several measures including the Multi-Agency Task Force which will be strengthened, and cigarette transhipment rules will be tightened.
“Essentially, the excise duty rate – while remaining unchanged for conventional cigarettes – will be imposed on next-generation cigarette devices and the liquid consumables, ” RHB said.
The research house has maintained its earnings forecast on BAT Malaysia due to the execution risk.
“Our sensitivity analysis suggests a 6%-7% upside to financial year 2021 earnings, from a one percentage point drop in illicit trade’s market share. We believe BAT’s share price could react before the actual earnings impact crystalises, ” it said.
Meanwhile, CGS-CIMB said Budget 2021 may have provided the shot in the arm that BAT “sorely needed” to nurse its sales back to health after years of battling the raging illicit tobacco trade.
“Although the limitations on cigarette transhipments can be a catalyst for BAT, we remain sceptical about how effective enforcement efforts against cigarette smuggling can be, ” it said.
However, CGS-CIMB said it is “more excited” with the government’s plan to charge a 10% excise duty on all e-cigarette and vape devices. The excise duty for the liquid used for vapes would be 40 sen per ml.
“This should serve as BAT’s entry into the flourishing vape market, which has grown from a virtually zero market share in 2017 to 9% in fourth quarter 2019.
“In fact, we suspect that vapes were the culprit for the illicit share to rise to 65% in August 2020, ” it said.
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