BAT to benefit if nicotine vaping is regulated

UOB Kay Hian Research noted that the existing illegal nicotine vaping market is estimated to have a value of RM300mil in tax revenue for the government.

PETALING JAYA: The expected eventual introduction of regulations to legalise nicotine vaping, offers significant potential upside for British American Tobacco (Malaysia) Bhd’s (BAT) stock, according to UOB Kay Hian Research.

The research unit noted that the existing illegal nicotine vaping market is estimated to have a value of RM300mil in tax revenue for the government.

To put that into perspective, BAT paid RM1.38bil in tax (RM1.3bil of excise duties and RM80mil in corporate tax) to the government in 2020.

“Assuming BAT has a similar market share to the illegal vaping market as it does with conventional cigarettes (around 50%), this implies a potential of 11% in additional sticks or stick equivalent vaping sales for BAT,” said UOB Kay Hian Research.

Based on data from the Malaysian Vape Chamber of Commerce, the potential upside could be significantly higher given that it estimates that the vaping market is almost as sizeable as the legal conventional cigarette market.Also, BAT is ready to introduce its own line of nicotine vapour products once it is legalised.

UOB Kay Hian Research pointed out that BAT’s vapour products are under its Vuse brand, which is the leading vaping brand across key markets.

It averages 45% market share in the vaping category across the United States, United Kingdom, Canada, France and Germany.

According to the research unit, BAT’s management expects regulations to legalise nicotine vaping to be introduced sometime in 2022.

Nicotine vaping is prevalent in Malaysia (estimated a million smokers), says UOB Kay Hian Research.

During its inaugural sustainability strategy briefing, BAT had said its mission is to reduce the health impact of its business and to champion environmental, social and governance (ESG) excellence.

Its corporate strategy is five-pronged namely, combustible value growth, step-change in new categories, a simpler and smarter company, sustainability, and accelerating tomorrow’s leaders.

The group has budgeted RM20mil for its ESG programmes and efforts, and expects to raise it by 20% heading into 2022.

“This represents 6.5% and 8% of the 2021 and 2022 earnings respectively.

“While it is hard to quantify intangible ESG benefits, the budget appears reasonable and sustainable,” said the research firm.

BAT also revealed that its FTSE4GOOD rating as of June 2021 is 3.7 out of a possible 5 stars.

“This ranks BAT in the top 25% of companies. With that said, BAT is not in the FTSE4GOOD Index as it is a tobacco company,” said the research unit.

UOB Kay Hian Research maintained its “buy” call and target price of RM17.20 on the stock, which the research unit pointed out has limited downside given that it is recovering off a multi-year low in terms of volume demand and offers an appealing dividend yield of 7.3% to 7.2% for 2021 to 2023.