Friday 19 Jul 2024
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This article first appeared in The Edge Financial Daily on August 27, 2019

KUALA LUMPUR: Shares in British American Tobacco (Malaysia) Bhd (BAT) retreated to their 12-year low yesterday as poor market sentiment from the escalating US-China trade war worsened the already declining interest in the counter from concerns over further earnings erosion.

BAT was Bursa Malaysia’s third biggest loser for the day, closing 58 sen or 2.75% down at its intraday low of RM20.52, with a market capitalisation of RM5.86 billion. Its lowest close prior to this was RM20.33, recorded on March 5, 2007.

The latest fall extended the series of decline in the counter since April this year, which effectively erased the gains achieved from May 2018.

At its current price, BAT carries a historical dividend yield of 7.55% based on its dividend payout in the financial year ended Dec 31, 2018 (FY18) of RM1.55 per share — which represented 94.45% of its earnings per share (EPS) of RM1.64 that year.

BAT is the only listed tobacco player in Malaysia among competitors JT International Bhd (JTI) and Philip Morris (M) Sdn Bhd. It has a dividend policy of 90% of its earnings.

For the first half of FY19, BAT’s net profit fell 21.21% on-year to RM165.15 million from RM209.61 million, as revenue slid 4.18% to RM1.26 billion from RM1.32 billion.

The faster decline in net profit came as more customers switched from premium to value-for-money (VFM) cigarettes, coupled with higher operating expenditure for the impending roll-out of new products, including its heat-not-burn tobacco device, Glo.

Assuming equal sales and expenses in the second half of FY19, back-of-the-envelope calculation entails BAT to deliver FY19 EPS of RM1.16, which translates into RM1.09 dividend per share — representing yield of 5.3% based on current share price and previous payout ratio.

Still, the group’s annual dividend payout per share has been declining for three consecutive years since 2015 (see chart), with analysts expecting further reduction this year.

In a research note dated Aug 6, CGS-CIMB analyst Kamarul Anwar raised concerns over how electric vapes now command 10% of Malaysia’s overall tobacco market share, with illicit cigarettes making up another 60% as at end-June 2019.

“We postulate that vapes’ popularity may grow further hereon,” he said, pointing to how the latest vape models are more convenient and give a more potent nicotine hit while being less harsh on the throat.

“We also feel that cigarettes’ retail prices have become unaffordable for many Malaysians,” said Kamarul, who has a target price of RM21.88 — the lowest among 17 analysts covering the stock.

“To illustrate, Nanostix Innovations Sdn Bhd sells its closed-system vape pods at an average of RM10. The company touts that one pod has the same amount of puffs as 40 cigarettes, or two cigarette packs. BAT’s VFM cigarettes are retailed at RM12.40/pack,” he added.

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