KUALA LUMPUR (July 4): The full impact of the Covid-19 pandemic disruption on British American Tobacco (M) Bhd (BAT Malaysia) could have been felt in the second quarter of 2020 (2Q20) as the cigarette manufacturer contended with the effects of Malaysia’s movement control order (MCO), which had inevitably impacted cigarette volume sales.

Analysts wrote in their latest notes on BAT Malaysia that while they believe the second half of 2020 will be better for BAT as the economy gradually opens up, near-term earnings will likely remain volatile on the back of continued down-trading to value-for-money cigarette segment as well as a stubbornly high level of illicit cigarette trade. 

"For 2020E, we forecast core earnings to slide circa 30.2% year-on-year to RM252 million. Longer term, we are taking the stance that illegal tobacco trade is unlikely to abate in a sizable and meaningful manner and thus we expect bottom-line earnings to remain on a downward trajectory for 2021-22E.

"All in all, we are keeping our cautious stance on BAT Malaysia in view of the aforementioned factors. We trimmed 2021E earnings forecast by 1% while longer-term 2022E estimate cut by 12.1% broadly to take into account dwindling legal FMC (factory-made cigarette) volumes as well as further loss in market share,” Affin Hwang Investment Bank Bhd analyst Chow Wei Nien said in a note yesterday.

Chow said Affin Hwang cut its BAT Malaysia share target price to RM9.20 from RM10 with an unchanged “sell” call.

Yesterday, BAT Malaysia’s share price closed up 14 sen or 1.32% at RM10.76 for a market value of RM3.07 billion. 

For the first quarter ended March 31, 2020 (1QFY20), BAT Malaysia’s net profit fell to RM50.77 million from RM88.6 million a year earlier while revenue was lower at RM481.15 million versus RM620.96 million.

TA Securities Holdings Bhd analyst Jeff Lye Zhen Xiong wrote in a consumer sector note on Thursday (July 2) that BAT was among four companies under TA Securities’ consumer sector coverage. Lye said these companies’ 1Q20 results were uninspiring as their numbers underperformed the research firm's estimates. 

"Aeon Co (M) Bhd, Johore Tin Bhd, Nestle (M) Bhd and BAT Malaysia came in below estimates due to larger-than-expected business disruption arising from the MCO which dented product demand and elevated operating costs.

"Downgrade consumer sector to 'neutral' from 'overweight' previously as potential upside has reduced across stocks under coverage. Amid the recent volatile share price movement, we take this opportunity to upgrade BAT Malaysia to 'buy' from 'sell' and Aeon Co to 'buy' from 'hold' following the run-down in their share prices,” he said.

On BAT Malaysia, he said TA Securities trimmed its FY20, FY21 and FY22 earnings forecast for the company by 12.8%, 4.1% and 1.2% respectively as the research house cut its cigarette volume by 4% to 6% and input lower operating expenses corresponding to the group's cost optimisation effort.