CIMB Research keeps reduce call on BAT

KUALA LUMPUR: CIMB Equities Research is keeping its Reduce call on BAT due to its rich valuations. Its target price is RM28.51 compared with the last traded price of RM36.28.

It said on Thursday during its recent discussion with BAT, the group said some illicit cigarette smokers have switched back to legal cigarettes as the government has ramped up enforcement to curb the illicit tobacco trade.

The Department of Statistics Malaysia’s data showed imports of tobacco products soared by 42.9% on-year in January 2019, a first since 2015.

Even so, BAT felt that more raids are needed to shrink illicit tobacco’s market share (4Q18: 64%).

“The group estimated c.80% of sales from illicit cigarette smokers who reverted to BAT opted for its value-for-money (VFM) brand Rothmans. As we highlighted in our February report (No longer affordable), Rothmans is margin-dilutive and its sales would hardly nudge the bottomline.

“Besides, our FY19F forecast has already accounted for a c.167% on-year jump in Rothmans’ sales volume.

“As low-margin Rothmans is widely expected to drive sales in FY19F, volume recovery would not be a catalyst for BAT. Premium cigarettes that command better margins are unaffordable for the majority of heavy smokers,” it said.

CIMB Research pointed out data from the National Health and Morbidity Survey 2015 showed that 74% of smokers had household incomes which were below the 2016 national median.

Out of those, 57.5% smoked 10 cigarettes a day or more. The survey excluded foreign workers, according to the Centre for Public Policy Studies.

“BAT said it is in no rush to launch its heat-not-burn (HNB) product, Glo. The group feels that HNB is not what smokers of cheap illegal cigarettes would fancy.

“A HNB device costs at least RM200, which can be expensive for the lower-income segment. The taste is milder than what they currently smoke. In our view, even if the supply of illicit cigarettes dries up, a lower-income smoker would resort to roll-your-own tobacco or vape,” it said.

CIMB Research recommended Carlsberg (Add, TP RM24.30) for exposure to potential beneficiary of the crackdown against illicit trade, and expectations of strong sales and premiumisation of products.

Source : TheStar