BAT near-term earnings outlook still challenging

Analysts have lowered their earnings projections for BAT for this year and next.

PETALING JAYA: British American Tobacco (M) Bhd’s (BAT) earnings outlook in the near term remains challenging amid the lack of robust income streams from new segments to fill the void left by the combustible cigarette segment.

At the same time, while its vapour product Vuse would be a potential revenue growth driver for the tobacco company going forward, the costs of growing the brand may impact its margins in the near term.

As such, analysts are cautiously optimistic about BAT and have lowered their earnings projections for this year and next.

Hong Leong Investment Bank (HLIB) Research said although the passage of the Tobacco Bill, at the expense of dropping the Generation End Game (GEG) clause, has somewhat mitigated the long-term risk of a shrinking customer base, BAT continues to face the growing prevalence of vaping, which could undermine cigarette sales.

“In contrast to the traditional cigarette market, which is limited to only three main players in Malaysia (BAT, Philip Morris (M) Sdn Bhd and JTI Malaysia), the vape market is highly fragmented, with numerous vape brands entering the market and listing in convenience stores and vape sales outlets,” it said.

Recall that the most publicised aspects of the 2022 Bill, dubbed the GEG Bill, were the proposals to prohibit persons born on or after Jan 1, 2007, from smoking tobacco products, substitute tobacco products and smoking substances and the sale of the aforesaid products and smoking devices to persons within this category of people.

The research house said the expansion of the vape market at the expense of traditional cigarette market share has led to the dispersion of sales among multiple vape brand owners, thereby putting pressure on BAT’s sales performance.

“Given the lack of robust earnings streams from new segments to fill the void left by the combustible cigarette segment, we opine that BAT’s earnings outlook remains challenging,” it noted.

Meanwhile, UOB Kay Hian (UOBKH) Research said while it still believes the vapour market represents a significant catalyst for BAT, margins may be affected by the costs of growing the brand in the near term.

“We expect the heightened marketing costs to persist into early 2024 and then taper slowly as BAT matures the brand, with significant earnings contributions being slightly further out,” it added.

Following its launch in July last year, BAT has put persistent effort into pushing Vuse as an alternative to its combustible cigarettes.