KUALA LUMPUR (Feb 7): British American Tobacco (Malaysia) Bhd’s (BAT Malaysia) earnings outlook remains challenging due to the growing prevalence of vaping, which is expected to persistently erode the group's combustible cigarette segment which anchors the group's sales, according to Hong Leong Investment Bank (HLIB) Research.

In a note on Wednesday, HLIB maintains its "hold" call on BAT Malaysia with an unchanged target price of RM9.22 based on an unchanged discounted cash flow valuation methodology.

The research house said that despite the passage of the Control of Smoking Products for Public Health Bill 2023, which omitted generational endgame provisions and somewhat mitigated the long-term risk of a shrinking customer base, BAT Malaysia continues to face challenges from the rising popularity of vaping that could undermine cigarette sales.

HLIB said that unlike the traditional cigarette market — limited to BAT Malaysia, JT International Bhd, and Philip Morris (Malaysia) Bhd — the vape market is highly fragmented with numerous vape brands entering the market, listing in convenience stores, and being sold through vape outlets.

"The expansion of the vape market at the expense of traditional cigarette market share has led to the dispersion of sales among multiple vape brand owners, thereby putting pressure on BAT Malaysia's sales performance.

"Given the lack of robust earnings streams from new segments to fill the void left by the combustible cigarette segment, we opine that BAT Malaysia’s earnings outlook remains challenging," it said.

BAT Malaysia reported a lower net profit of RM47.36 million in the fourth quarter ended Dec 31, 2023 (4QFY2023), down 23.27% from RM61.72 million a year ago, as the group made significant investments in launching vape products, resulting in higher operating expenses.

For the financial year 2023 (FY2023) overall, BAT Malaysia’s net profit fell by 25.82% to RM194.75 million from RM262.52 million in FY2022, with revenue decreasing by 11% year-on-year (y-o-y) to RM2.3 billion from RM2.6 billion.

HLIB said BAT Malaysia's core profit after tax for FY2023 stood at RM193.1 million, showing a 31.5% y-o-y decline, meeting its expectations but falling below consensus forecasts.

Notably, despite a 1% decline in illicit market share, legal combustible volume for FY2023 experienced a decline as the returned volume shifted towards the e-cigarette category.

"We anticipate this trend to persist, potentially limiting BAT Malaysia’s combustible cigarette sales rebound if the illicit market share, currently at 55.6%, regains traction," it said.

At 10.20am, shares in BAT Malaysia traded nine sen or 0.99% lower at RM8.99, giving the group a market capitalisation of RM2.56 billion. The counter saw about 464,600 shares change hands.