Regulatory policies in play
Maintain BUY with unchanged DCF-TP of MYR15.20
We expect FY22 volume growth to remain positive alongside the reopening of the economy post-pandemic. Ramp-up in Government enforcement in key areas will also see more legal volumes return to the industry. However, uncertainties surrounding the potential new regulations may continue to weigh on BAT in the short-term. We keep our earnings estimates, BUY call and DCF-TP of MYR15.20 (WACC: 9.5%, LT growth rate: 2.5%) unchanged with an attractive dividend yield of >7%.
Volume growth driven by new strategies
Following BAT’s 4QFY21 results briefing, management shared that FY21 volumes grew 5% YoY (industry volume growth: +5% YoY) mainly due to (i) new route to market strategies through online and telesales instead of relying solely on exclusive distributors to push their products, and (ii) claw back of legal volumes from tighter trans-shipment regulations from 1 Jan 2021 onwards.
Increasing enforcement is key
4QFY21 illicit share has reduced by 6% ppts YoY (from 64% in Dec 2020) and we believe it could decrease even more if the Government heightens enforcement further. Stricter trans-shipment regulations have driven up smuggling activities at smaller coastal areas and jetty’s to >40% from c.10% previously. Hence, targeted enforcement in these aforementioned areas is vital. The price differential between legal and illicit cigarettes also has to be addressed for further decreases in illicit share, in our view. Note that the minimum price for cigarettes is MYR12/pack versus c.MYR4- MYR8/pack for illicit cigarettes.
Could the potential smoking ban fuel illicit share?
BAT believes that MOH’s intention to implement a generation smoking ban for people born after 2005 could exacerbate Malaysia’s already high illicit share (58%) given existing gaps in enforcement. Furthermore, should the ban be extended to vapour products, this may also be counter-intuitive in
promoting risk-reducing nicotine products to younger consumers against higher-risk illicit options. A new Tobacco and Smoking Control Act (including the regulatory framework for vapour products) is expected to be tabled in Parliament in Mar 2022.