British American Tobacco's Financial Performance Falls Short in 2023

British American Tobacco's (BAT) financial performance for the first half of the 2023 fiscal year, ending on June 30, fell short of expectations, and analysts believe that smoking bans and e-cigarette regulations will impact its future profitability.

BAT announced its second-quarter performance for the 2023 fiscal year yesterday, with net profit declining by 35.12% year-on-year to RM47.52 million, while revenue increased by 6.38% year-on-year to RM678.11 million.

The board announced a dividend distribution of 16 sen per share, with the ex-dividend date set for August 9.

The company's accumulated net profit for the first half of the year was RM87.84 million, a decrease of 30.02% compared to the same period last year. Accumulated revenue also decreased by 7.82% year-on-year to RM1.068 billion.

Most analysts believe that BAT's performance for the first half of the year did not meet expectations.

An analyst from CIMB Investment Bank pointed out that BAT's accumulated core net profit for the first half of the year declined by 32.10% to RM89.50 million, lower than his and the market's forecasts, which accounted for only 35% and 36% of their respective full-year forecasts.

He added that the decline in BAT's second-quarter core net profit was mainly due to an increase in the market share of illegal cigarettes and an increase in the use of e-cigarette products, resulting in lower than expected cigarette sales.

Meanwhile, an analyst from Affin Hwang Capital also stated that BAT's second-quarter performance was weaker than expected. The core net profit for the first half of the year accounted for only 35.1% and 39.2% of his and the market's full-year estimates, respectively.

Due to the underperformance, both CIMB Investment Bank and Affin Hwang Capital have lowered their financial forecasts for BAT.

CIMB Investment Bank has downgraded its core net profit forecasts for the 2023, 2024, and 2025 fiscal years by 21%, 18%, and 18% respectively.

However, Taohuaj Doria, a research analyst at Daiwa Capital, expressed satisfaction with BAT's second-quarter performance, stating that it met their expectations.

"Although BAT's core profit for the second quarter only accounted for 36% of our and the market's expectations, we expect that the early commercial spending on e-cigarette products and higher tobacco tax rate (30% for the second quarter) will slow down significantly in the second half of the year."

Taohuaj Doria analyst stated that without these two unfavorable factors, BAT's first-half profit would account for 48% of their full-year forecast.

Looking ahead, CIMB Investment Bank analyst pointed out that BAT's future is uncertain due to the government's postponement of the "Generation Extinction of Smoking” (GEG) bill to the October session of Parliament.

"BAT will not launch their e-cigarette products until a clear regulatory framework is established for the entire e-cigarette industry."

Analysts also mentioned that the delayed launch of BAT's e-cigarette products may have an impact on its sales, as the increasing popularity of e-cigarette products is expected to gradually erode the market share of traditional cigarettes.

In addition, Affin Hwang Capital analysts estimate that BAT's e-cigarette brands, Vuse and Glo, will face intense competition from other brands such as Volbar and Elfbar.

CIMB Investment Bank and Affin Hwang Capital are both negative on BAT's prospects. CIMB Investment Bank maintains a "hold" investment rating but has lowered its target price from RM10.86 to RM9.22, while Affin Hwang Capital maintains a "sell" investment rating and has lowered its target price from RM8.91 to RM8.37.

However, Daiwa Capital remains optimistic about BAT and maintains a "buy" investment rating, giving a target price of RM14.40.

Investment ratings and target prices from investment banks:

Investment Bank/Securities House Investment Rating New Target Price (RM) Previous Target Price (RM)

① Daiwa Capital◉ Buy ◉ 14.40◉ 14.40

② CIMB Investment Bank◉ Hold ◉ 9.22◉ 10.86

③Affin Hwang Capital◉ Sell ◉ 8.37◉ 8.91

Source: 

[1] Investment bank reports

[2] oriental daily