A premature exclamation
? The Health Ministry is now non-committal to its plan to table a new tobacco bill this year, citing the need for more engagements with industry players.
? Since the proposed law also encompasses vape regulations, there is a risk that British American Tobacco (BAT) will lose out to existing vape players.
? We raise our FY22F EPS by 5% by lowering our marketing spend estimate. BAT remains a Reduce, with our DDM-based TP inching up to RM10.53.
New tobacco control bill’s motioning possibly delayed
On 3 Mar, as per national news agency Bernama’s report, Health Minister Khairy
Jamaluddin said that the proposed act that covers a smoking restriction against those
born after 2005 is “still in the engagement stage” and will be tabled in Parliament only
after this process is completed — which could be in “this (Parliamentary) session or a
future session”. Previously, the health minister was adamant that the bill, tentatively
called the Tobacco and Smoking Control Act, would be ready to be proposed and
debated in the current session of Parliament. The Act also covers the regulatory
framework for vaporiser products and electronic cigarettes.
Vape regulation also delayed – a long-term negative for BAT
BAT had hoped that the proposed tobacco bill would allow it to branch out into reduced harm products, like vapes, which is currently illegal under the Poisons Act 1952. However, the delay of the bill’s tabling could increase the chance of smokers, who are already feeling the pinch from rising daily expenses, turning to grey-market vapes, in our view. We think it was no coincidence that BAT’s sales recovery in FY20-21 only happened when the Covid-19 lockdowns were imposed; while many Malaysians lost their
income, some were saving on other expenses (thanks to government aid and a lack of social and travelling activities) and channelling the extra money to cigarettes. The illicit tobacco’s yoy reduction in market share in Nov 2021 (55% from 64% in 2020) did not translate into a binary exchange with the legal market because vapes were in the equation.
Reiterate Reduce
Our fear is the bill could reach a stalemate if no stakeholder budges from its stance. One major issue arising from the proposed Act is the Finance Ministry setting the vape liquid and gel excise duty at RM1.50/ml, which the Bumiputra-majority vape-trader community had baulked at because it is much higher than the existing vape liquid’s retail price/ml. We dialled down our estimates for BAT’s FY22F marketing expenses due to the slim chances of the group rolling out its vapes by this year. This consequently raises our FY22F and FY24F EPS by 5-6%. Our DDM-based TP rises to RM10.53, but our call
remains a Reduce given the unconducive regulatory framework for legal cigarette volume growth. Potential de-rating catalysts are lower sales and more down-trading. Upside risks: the government rescinds its “generation end-game” proposal for cigarette sales and tones down on the vape liquid excise duty.