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Briefing update

Maintain BUY with unchanged TP of MYR15.20

BAT will be able to launch its vapour product, Vuse, once the regulatory framework is released in 4Q21. Vuse will be positioned within the affordable mid- price range but the group did not guide on product prices at this juncture. Upon adjusting for higher tax expense relating to the ‘prosperity tax’, our FY22 earnings estimates are lowered by 6% while FY21 and FY23 estimates are left unchanged. Maintain BUY with unchanged DCFTP of MYR15.20 (WACC: 9.5%, LT growth: 2.5%).

Positive volume growth from lower illicit share

During BAT’s 3Q21 results briefing, management shared that its positive volume growth YTD (+7% YoY; industry: +6% YoY) was mainly attributed to the clawback of legal volumes after firmer trans-shipment regulations were enforced on 1 Jan 2021. This also led to a decline in illicit share to 57.9% (-6 ppts YTD). Separately, the 3Q21 restructuring costs of MYR2m involved certain parts of its trading business which moved onto digital platforms. This exercise is expected to be completed by 1H22.

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Waiting for the green light to launch ‘Vuse’

Following the Budget announcement on nicotine-based excise tax on vape juices & gels from 1 Jan 2022, BAT is awaiting the release of a formalised regulatory framework before it can launch its own brand, ‘Vuse’ (Figure 3), in Malaysia. BAT did not share its pricing strategy but it aims to position ‘Vuse’ in an affordable mid-market price range, similar to its value-for money and aspirational segments for cigarettes. The vape market currently accounts for c.10% of industry volume share and BAT targets to
be a market leader within 3 years.

Imputing earnings impact from prosperity tax

Based on guidance from management, the ‘prosperity tax’ announced in Budget 2022 could potentially raise its FY22 tax expense by c.MYR20m. Hence, imputing a higher effective tax rate of 31% (vs. 27% previously), we prudently lower our FY22 earnings estimates by 6%. Our FY21 and FY23 earnings estimates are unchanged.