After enacting a smoking ban on eateries nationwide, the Ministry of Health (MoH) is reported to be considering the designation of other public places as non-smoking areas. We believe the incremental impact would be more limited this time around, given that many public spaces had already been gazetted as smoke-free areas. Our assessment of the effect of the potential legislation vis-à-vis similar enactments in other countries is unclear, as we found the resulting impact differing by country. Ultimately, we still expect the authorities’ tighter oversight on tobacco usage to be a net positive to the legal cigarette manufacturers, particularly with regard to the crackdown on the illicit cigarette trade. Maintain BUY on BAT, with an unchanged TP of RM40.20.

Not a New Development

In our view, the extension of the smoking ban in public spaces would be limited in scope this time, with as many as 19 types of places already covered by the ban since 2007, not including the recent ban on public parks and eateries nationwide. To recap, management had previously guided for a 1% decline in total cigarette volume sales as a result of the smoking ban on eateries implemented on 1 January 2019.

Impact of Smoking Ban Differs by Country, Depending on Context

Based on our observation of global peers, the impact of a ban on smoking habits varies from country to country, depending on factors such as scope of implementation as well as degree of enforcement. We had factored in a 2% annual decline in total cigarette volumes to partially account for the inhibiting effects of tighter regulations on smoking.

Maintain BUY

Overall, we hold onto our positive stance on BAT’s prospects, with potential gains from the authorities’ crackdown on the illicit cigarette trade (c.62% of total market) outweighing the risk of volume declines from the smoking ban extension. Also, as mentioned, some of the regulatory risks pertaining to the industry are already factored into our forecasts. Hence, we maintain our BUY recommendation on the stock with an unchanged TP of RM40.20. Downside risks: i) slower enforcement activities; ii) aggressive excise duty hikes; and (iii) heightened competition from heated tobacco products.

Source: Affin Hwang Research - 3 Apr 2019