Rebel with a cause
? BAT said it had communicated to the government its view on the economics
and social ramifications of the proposed new tobacco bill.
? BAT talked about the need to “narrow the gap” between legal and illegal
cigarette prices – but we doubt the government will relent to cut prices.
? Reiterate Reduce. We believe BAT’s sales would return to their declining
ways as the economy re-opens – like prior to the Covid-19 pandemic.
BAT sounded off generation end game at post-1Q22 virtual briefing
? At British American Tobacco’s (BAT) post-1Q22 virtual briefing on 10 Jun, the group
vocalised its criticism against the present administration’s “generation end game”
proposal, whereby the Health Ministry is seeking to prohibit the sale of cigarettes and
other smoking products to those born after 2005. Rather than astroturfing behind thirdparty experts or non-profit organisations, we believe BAT, being an industry player,
speaking up for itself sends a strong signal to the government that the “generation end
game” comes with a domino of social risks that will ultimately enrich black market
players only.
? The group said it had presented its view to the government, where it shared case
studies of countries that implemented a blanket ban on smoking and ended up
amplifying their shadow economies and smoking populations. What BAT said the
government can do to slash smoking prevalence in Malaysia is to promote vaping as a
smoking cessation tool, like what the UK’s National Health Service (NHS) is doing.
? BAT also repeated what we have been writing over the past months: the Finance
Ministry’s proposal of RM1.20/ml excise duty rate for vaporiser products’ and
electronic cigarettes’ nicotine-based liquid and gel is too high. It would only dissuade
smokers from turning to vapes. We, however, fear a worse situation: it would spawn a
new black market for vapes and their liquid and gels. The excise duty will only be
imposed once the Parliament passes the tentatively titled Tobacco and Smoking
Control Act.
Reiterate Reduce
? BAT also made a refreshing acknowledgement that regulated cigarette prices are out
of many Malaysians’ reach – especially when the world is battling with high inflation.
? BAT said the gap between legal and illicit cigarette prices ought to be narrowed to
combat the black market. Our theories are either BAT wants the illicit cigarettes’
supply to be slashed so that their prices would soar near legal cigarettes’, or that it is
hoping that the government would consider lowering cigarettes’ excise duty.
? To illustrate the chasm, BAT said contraband cigarettes are sold between RM4 and
RM9/20-pack. Legal cigarettes meanwhile retail between RM12 and RM17.40/20-
pack. Should a minimum-wage earner smoke a pack of cigarettes every day, the
cigarette bill would make up at least a quarter of the person’s gross income.
? We do not expect the present administration to help relieve tobacco players’ problems.
Health Minister Khairy Jamaluddin appears to be determined to table the Tobacco and
Smoking Control Act in Jul 2022’s Parliamentary meeting, according to an Apr 2022
Bernama report. This bill covers the “generation end game” and vape regulations.
Also, the Finance Ministry has not indicated it is considering stakeholders’ grouses
against the RM1.20/ml-excise duty for vape liquid and gels. And the economic reopening, in our view, should kick-start BAT’s sales volume slide again as smokers will
need to reallocate their incomes to other obligations.
? In our view, the company’s downside earnings risks on the potential sagging sales
underpin our Reduce call. Our DDM-based TP of RM8.77 presents a 26.8% potential
downside, which outweighs the gain from our projected CY22-24F’s 6.9% dividend
yield. Upside risks: the government rescinds the “generation end game” proposal for
cigarette sales and tones down on the vape liquid excise duty.