PETALING JAYA: British American Tobacco (M) Bhd’s (BAT) environmental, social and governance (ESG) compliance is set to strengthen with its gradual diversification into non-combustible products, according to Maybank IB Research.
The research house said the industry is under increasing pressure to address the harmful effects of cigarette smoking, while rising global health awareness and unfavourable government policies pose additional challenges to the growth of the industry.
BAT’s primary ESG issues are negative social and health implications of cigarettes, it added.
“As such, BAT strives to broaden its product portfolio to include non-combustible products such as tobacco heat and vapour products to address the global secular trend among consumers in the shift from combustible cigarettes to alternative “less risky” products.
Maybank IB noted that “Increasing the consumption share of alternative products within its consumer base will also alleviate concerns around the public health impact of smoking.
“That said, tobacco heat product penetration (‘Glo’) has been slow, representing only 1%-2% of total industry volumes in Malaysia.”
BAT’s carbon footprint is also relatively low. Due to the tough business conditions, BAT closed its largest manufacturing facility in 2017.
Although about 1% of its products is still manufactured at its Johor Bahru facility, the company also import close to 99% of products from other BAT-affiliates.
The research house said BAT is committed to lessen its environmental impact and has reduced its energy and water consumption at its site offices and warehouses by 5% and 7% year-on-year in 2019
Maybank IB, which is maintaining its “hold” stance on the stock with an unchanged discounted cash flow-based (DCF) target price of RM12.60, said the tobacco industry is expected to continue facing challenges in volume growth in light of high illicit share of 64% as at end-of the fourth quarter of last year.
“Tighter transshipment regulations could improve legal cigarette volumes but we believe a meaningful decline in illicit share will only materialise when the price gap of legal and illicit cigarettes narrows appreciably, ” it added.