KUALA LUMPUR: Maybank Investment Bank (Maybank IB) said the reintroduction of small-pack cigarettes that were banned in 2010 could be a positive development to the tobacco industry.
Tobacco companies reportedly proposed to reintroduce small-pack cigarettes as a move to tackle the growth of illicit cigarettes.
“This would also provide a legal alternative to smokers as it ‘bridges’ the pricing gap between the legal and the illegal cigarettes,” said the research house in a note.
British American Tobacco (BAT) estimates smaller packs would drive down illegal cigarette volume by 55 per cent by 2020, almost in line with the Custom’s target.
“While we understand that certain restaurants and retail associations are for it, there are some pushback from NGOs (non-governmental organisations) and the Ministry of Health,” Maybank IB added.
It said, quoting Euromonitor, prior to the ban of small packs (less than 20 sticks) on June 2010 by the Health Ministry, small packs used to make up 35 per cent of local cigarette volume.
Maybank IB however said BAT gross profit margin contracted in 2010 by about two percentage point mostly due to the smaller pack ban that carried higher margins.
Assuming margins are similar to the current 20-stick pack, it estimates that with every one percentage point market share gain by the licit operators could lift BAT’s financial year 2018 and 2019 net profits by RM5 million per year, based on the company’s 42 per cent market licit market share at end of December last year.
For now, Maybank IB maintained its earnings forecast for BAT pending further updates and developments.
The research house reiterated a “hold” call on BAT with an unchanged target price of RM47.10.