KUALA LUMPUR: British American Tobacco (BAT) earnings outlook remains challenging due to the lack of robust earnings streams from its new segments, and the market for combustible cigarettes is trending downward.
According to research from Hong Leong Investment Bank (HLIB), BAT saw a significant loss in sales volume for the fiscal year 2023 (FY23), falling 12.9 per cent compared to the legal industry's relatively small drop of 1 percentage point in combustible volume.
"This larger decline can be attributed mainly to two factors, ongoing down trading activities impacting BAT's Premium and AP sales, which contribute around 70 per cent of the group's combustible cigarette sales, and weaker sales following a price hike in September 2023.
"Particularly, the price increases in BAT's Dunhill and Peter Stuyvesant brands have created a price gap with competitors like Philip Morris International (PMI) and Japan Tobacco International (JTI), adding pressure to the group's fourth quarter (Q4) cigarette sales.
"Unless JTI and PMI also raise their prices, this is expected to continue affecting BAT's sales performance," it said.
In response to the declining trend in the combustible cigarette market, BAT has introduced a new brand called Luckies to diversify its brand offerings and safeguard its market share.
Leveraging on BAT's extensive sales network and Luckies' competitive price point, which is RM12 compared to Rothman's RM12.40, this new brand has received positive attention since its launch.
"Consumer awareness, as measured by BAT's surveys, has shown significant growth from 16 per cent in the first week to 44 per cent in the fifth week after the launch.
"Tracking this, Luckies' market share has risen from 0.1 per cent in August 2023 to 1.4 per cent in December 2023."
Meanwhile, sales generated from its vape brand, Vuse, stood at less than two per cent of the BAT sales, with the group targeting the new category (Vuse and THP) to achieve 30 per cent of total sales in the next three to five years.
"The primary focus will be on expanding the Vuse brand, which involves increasing product offerings and expanding the sales network.
"BAT plans to enhance its sales reach by listing Vuse products in more retail outlets and vape outlets.
"Currently, Vuse products are available in 6,600 retail outlets and 1,100 vape stores, significantly fewer than the 45,000 outlets for BAT's combustible cigarettes, suggesting more room to grow," it added.
However, the stated contribution from the new segment will remain insignificant in the early stages.
HLIB held its 'hold' call on the stock with an unchanged target price of RM9.22.