Page 24 - WAD BEYOND GLOBAL June 2020

FEATURE

Covid-19’s impact on the big three tobacco companies “While much uncertainty remains regarding the immediate
and longer-term impact of Covid-19 on the business, it is pretty
Declining to provide guidance on 2020 earnings, Reed says BAT clear that the industry will continue to see both volume and
Malaysia is constantly monitoring and adjusting its plans as value declines with further pressure on margins. This has
needed to ensure business continuity. “Like any business, we required us to remain focused on the investment side of our
consistently review our cost base so our investments are in line business and reflect the new industry reality accordingly. Only
with our business priorities. This is to ensure the sustainability by restoring scale to the legitimate industry, by eradicating
of our business and shareholder returns.” the illicit cigarette trade, will we see an improvement in the
industry’s prospects.”
He highlights the group’s cost-cutting initiatives, which resulted
in operating expenses falling 18% year on year in the financial According to CTOS data, JTI Malaysia’s net profit and revenue
year ended Dec 31, 2019 (FY2019). fell 6% y-o-y to RM54.09 million and RM1.18 billion respectively
in FY2018. Its latest set of accounts for FY2019 is unavailable.
BAT Malaysia, whose profits have been declining since FY2016,
saw a 27% y-o-y drop in net profit to RM343.81 million on the O’Rourke believes now is the best time for the government
back of an 11% y-o-y dip in revenue to RM2.51 billion in FY2019. to open a consultative process with private-sector employers
It blamed the weak performance on legal market contraction to see how best to strike a balance between reducing the spread
and downtrading to cheaper options. of Covid-19 and protecting Malaysian jobs and shoring up
the economy. “This would surely be in the national interest
The group ended last year with cash and bank balances of and the contribution of the private sector in finding workable
RM20.39 million and total borrowings of RM421 million, leading solutions should not be underestimated.”
to a net debt position of RM400.61 million.
Naeem says Philip Morris Malaysia has over the last few
Year to date, BAT Malaysia’s share price has fallen 29% to close months implemented business continuity plans to ensure
at RM10.70 last Wednesday, for a market capitalisation of adequate inventories of its products, on average, across all
RM3.06 billion. It is currently trading on a forward 12-month markets. “Our focus is to look at ways to meet the demand
price-earnings ratio of 9.71 times. of our customers who have moved away from smoking to
reduced-risk products like IQOS.” The company launched IQOS,
Bloomberg data shows that of the 17 analysts covering the which heats tobacco rather than burning it, in November 2018.
stock, 14 call it a “buy” and three a “hold”. None recommend
a “sell”. Analysts have an average 12-month target price of “Once the situation is under control in Malaysia, we will
RM14.88 on BAT Malaysia. continue with our mission of moving as many adult smokers
who would otherwise continue to smoke away from cigarettes
The company is adjusting to operating within the MCO towards a better alternative such as heated tobacco products
environment, says Reed, who assumed his current role on like IQOS,” he adds.
April 1. “Our first priority is to ensure the safety and security
of our staff. Of bigger concern to us, is that illegal tobacco CTOS data shows Philip Morris Malaysia’s net profit was down
operators are taking advantage of the MCO supply 25% to RM1.27 million in FY2018, even though revenue grew by
restrictions on the legitimate industry to sell cheap contraband a marginal 1% to RM138.34 million.
cigarettes.”
Going forward, tobacco players may have to contend with more
JTI Malaysia’s O’Rourke says it is too soon to gauge the overall headwinds.
impact of Covid-19 on its business. “While it remains too early
to say what impact this will have on the tobacco category AllianceDBS Research analyst Abdul Azim Muhthar says in
in the medium term, initial signs point towards continued a March 25 report that the Malaysian tobacco industry’s
downtrading to value brands. This is reflected in retail, landscape remains challenging due to declining cigarette
where brands such as LD (which retails at RM11.90 for a 20-stick consumption per capita given an increasingly health-conscious
pack) are depleting at a faster rate than premium brands,” he population, high illicit trade, regulatory risks and emergence of
says. alternative offerings such as tobacco heating products.

Describing consumer sentiment as “cautious” right now,
O’Rourke tells The Edge JTI Malaysia is maintaining its 2020
outlook for now. “Our projection is for continued market The above article first appeared in The Edge Malaysia Weekly on
contraction amid the widespread availability of illicit cigarettes. April 13, 2020. Reproduced with permission from The Edge Malaysia.

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