Uncertainty Surrounds British American Tobacco as Vape Launch is Delayed

There is uncertainty surrounding British American Tobacco (M) Bhd (BAT) as the launch of its vape products (VUSE) is delayed, potentially impacting its prospects. Hong Leong Investment Bank (HLIB) Research reported that the tobacco bill, which would allow for the entry of BAT's vape products into the market, will be postponed until the next parliamentary session in October. This delay hampers BAT's ability to gain significant market share, as there are already a wide range of vape products available. Furthermore, the increasing availability of e-cigarette products is expected to gradually erode the market share of traditional cigarettes, which could affect BAT's sales.

In a recent filing with Bursa Malaysia, BAT announced a core profit after tax of RM89.5 million in the first half of the year, falling below expectations. The lower sales volume, driven by the resurgence of the illicit market share and increased usage of vape products, contributed to this result. HLIB noted that although BAT's revenue increased by 6.4% year-on-year, the core profit after tax was 35.7% lower due to a higher tax rate and operating costs. The tax rate of 29.7% exceeded last year's rate of 29% during the Prosperity Tax period, mainly due to non-deductible expenses.

HLIB maintained a "hold" rating on BAT but reduced its core profit after tax projections for FY23-25, leading to a downgrade of its target price from RM10.86 to RM9.22.

In summary, BAT's entry into the vape market faces uncertainty due to a delayed tobacco bill, potentially impacting its prospects. The increased availability of e-cigarette products further poses a threat to traditional cigarette sales. As a result, BAT reported lower than expected profits in the first half of the year, with a decrease in sales volume and higher operating costs contributing to this outcome. HLIB maintained a "hold" rating on BAT but adjusted its core profit after tax projections and target price downward.