KUALA LUMPUR (July 25): Hong Leong Investment Bank (HLIB) Research has lowered British American Tobacco (Malaysia) Bhd's (BAT) target price (TP) while maintaining its "hold" call on the stock after the group's lacklustre results in its second quarter ended June 30, 2023 (2QFY2023).

HLIB Research lowered its TP to RM9.22 (from RM10.86) based on an unchanged discounted cash flow valuation methodology.

BAT posted a lower net profit of RM47.53 million for 2QFY2023, down 35.11% from the RM73.25 million made in 2QFY2022 despite higher revenue by 6.38% at RM678.12 million from RM637.46 million, while the group increased its investments towards launching vapour products which hiked up operating expenses to RM100.8 million from RM60.58 million.

In a research note, analyst Sam Jun Kit has also trimmed BAT's core profit after tax forecast for the financial year 2023 (FY2023) by 21%, followed by 18.1% for FY2024 and 15.4% for FY2025.

“We believe that the turning point for BAT now hinges on the passage of the tobacco bill, but it is deemed an uphill task due to the possible lack of support from members of Parliament (MPs),” he said on Tuesday (July 25).

“The absence of a clear and comprehensive regulatory framework for the entire vape and e-cigarette industry leads us to believe that BAT will refrain from launching its vape product.

“This disallows the group from capitalising on the growing vaping trend in Malaysia,” he said.

Sam noted that the delay in launching its vape product could have a negative impact on BAT, especially since there are currently no regulations governing the sale of nicotine vape products, making vape accessible to anyone, including minors under the age of 18.

“The increasing availability of e-cigarette products is expected to gradually erode the market share of traditional cigarettes, which will in turn affect BAT's sales.

“Additionally, the prolonged delay in passing the tobacco bill could position BAT as a late entrant in the vape space, hindering Vuse from making significant inroads into the Malaysian market given the extensive range of existing vape products available,” he said.

Sam said that BAT’s 2QFY2023 lacklustre performance was below its expectation at 35% of full-year forecasts and consensus at 36%.

“The negative deviation was mainly due to lower-than-expected cigarette sales amid the increase in illicit market share mainly in 1Q2023 and the growing usage of vape products.”

In the morning trade, BAT shares rose by six sen or 0.58% to RM10.36, with a market capitalisation of RM2.96 billion.

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