Sunday, June 16

BAT 1Q16 earnings greatly impacted by excise duty hike

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KUCHING: British American Tobacco Bhd (BAT) saw a great drop in revenue in the first quarter of 2016 (1Q16) by 19.9 per cent year on year (y-o-y) to RM1.02 billion as higher average selling prices (ASPs) failed to offset the large domestic volume decline of 34.1 per cent y-o-y.

Analysts Affin Hwang Investment Bank Bhd (Affin Hwang Capital) noted that this quarter is the first full quarter following the large excise duty hike in November and is compared to a high base in 1Q15 due to pre-GST stock ups.

Its core net profit also decreased by 27.9 per cent y-o-y to RM175.5 million, it said, coming in below the research firm and consensus expectations, making up 20 per cent of full-year forecasts.

“Following the all-time high illicit cigarettes incidence, BAT’s market share declined,” it said in a report yesterday. “The overall pressure on the legal market has caused consumers to switch to cheaper alternatives, as seen through the illegal cigarettes incidence which has spiked to an all-time high of 45.6 per cent as of December 2015.

“As a result, BAT’s market share decreased by 2.3 ppts to 58.7 per cent, mainly due to a decline in Dunhill’s market share of 2.6 ppts to 43.5 per centbut continues to be the market leader.

Kenanga Investment Bank Bhd’s research team (Kenanga Research) sais the negative reaction of volume to the price increase was worse than initially expected.

“The illicit market share strengthened to a staggering 45.6 per cent in December 2015 as consumers were forced to down-trade with the affordability of legal cigarettes significantly dented by the price increase,” it hightlighed in a separate report.

“Furthermore, BAT has lost market share by 2.3 percentage points to 58.7 per cent in 1Q16 from 61 per cent in FY15, as the premium segment fell prey to the downtrading behaviour in the legal industry due to the higher selling prices.

“As such, the Group has announced the cessation of its operations in Malaysia due to the low utilisation rates.

“In a nutshell, we have turned more pessimistic on the outlook of BAT as well as the whole legal tobacco industry as we do not foresee the volume to rebound significantly in the near term. We think that the downcycle is likely to persist as the affordability issue of cigarettes is not within the Group’s reach to address.”

Affin Hwang Capital said hazy outlook continues for BAT Malaysia, but potential cost efficiencies may be on the horizon.

“Recall that BAT announced that it will cease its factory operations in stages, targeted to complete by gthe second half of 2017 and instead source for tobacco products from its regional BAT factories such as Singapore, Indonesia and South Korea.

“Moving forward, this could potentially improve margins due to cost efficiencies as it is cheaper to source from regional factories due to better capacity utilisation.”