According to Malaysian business media Business Time, British American Tobacco's (BAT) profit outlook remains challenging, mainly due to the lack of strong profit streams in its new areas and the downward trend of the combustible cigarette market.
Research by Maybank Bank (HLIB) shows that BAT's sales volume in financial year 2023 (FY23) will decline significantly, which is 12.9% lower than the relatively small decline of 1 percentage point in combustible volume in the statutory industry.
"This larger decline is primarily attributable to two factors, continued downgrade activity affecting BAT's premium and AP sales, which contribute approximately 70% of the group's combustible cigarette sales, and price increases in September 2023 Later sales fell. In particular, price increases for BAT's Dunhill and Peter Stuyvesant brands led to competition with rivals such as Philip Morris International (PMI) and Japan Tobacco International (JTI). The price gap between the two companies has increased the pressure on the group's fourth quarter (Q4) cigarette sales. Unless JTI and PMI also increase prices, this is expected to continue to affect BAT's sales performance."
Facing the declining trend of the combustible cigarette market, BAT launched a new brand called Luckies to enrich its brand products and protect its market share. Leveraging BAT's extensive sales network and Luckies' competitive price points, the new brand has received positive attention since its launch.
“According to BAT’s survey, consumer awareness increased from 16% in the first week after launch to 44% in the fifth week. Luckies’ market share has been tracked to increase from 0.1% in August 2023 to 2023 1.4% in December.”
At the same time, currently, its e-cigarette brand Vuse generates less than two percentage points of BAT sales, and the group aims to have the new categories (Vuse and THP) reach 50% of total sales in the next three to five years. 30%. “The main focus will be on expanding the Vuse product line, which involves increasing product offerings and expanding the sales network.
“BAT plans to increase sales coverage by listing Vuse products in more retail stores and e-cigarette stores. Currently, Vuse products are available in 6,600 retail stores and 1,100 e-cigarette stores, which is far less than BAT’s 45,000 sales of combustible cigarettes points, which shows there is more room for growth."
However, in the early stages, the contribution of the new tobacco sector will still be insignificant.
Currently, HLIB has a "hold" rating on the stock, with an unchanged target price of RM9.22.
