[KAYAPLUS]: BAT (4162) BRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD
Business Summary British American Tobacco (Malaysia) Berhad is a Malaysia-based tobacco company that deals with the sale of cigarettes. Since the delisting of Japan Tobacco Inc in 2014, BAT is the only listed tobacco company in Malaysia.
BAT has key brands in all three cigarette product segments in Malaysia:
Premium segment– DUNHILL
Aspirational premium segment – PETER STUYVESANT and PALL MALL
Value-for-money segment - ROTHMANS
Years ago, BAT was a darling stock. It was a stable stock to hold with
good dividend yields in the range of 5-6%. Sadly, a lot has changed
since then. BAT had a market capitalization of RM 20.8 billion in Jan
2014. In the year 2020, we have seen RM 17.2 billion of its market cap
wiped off, where it is now trading at around RM 3.6 billion. How much
is RM 17.2 billion? It is more than the combined market capitalization
of alcohol manufacturers Carlsberg Brewery Malaysia Bhdand Heineken Malaysia Bhd.
BAT has since been removed from the FBMKLCI index and the MSCI Global Standard Index.
So, what went wrong in the past 6 years that led to this >80% loss in value? Last update: 01.05.2020
Dividends (2/5): ⭐ ⭐
Value (2/5): ⭐ ⭐
Financials (3/5): ⭐ ⭐ ⭐
Growth (2/5): ⭐ ⭐
Business (3/5): ⭐ ⭐ ⭐ Reference: (i) MyKayaPlus Metrics Definition (ii) MyKayaPlus Metric Evaluation Scale
Financial Performance
After achieving historical high revenues and net profits in 2014, BAT
went on consecutive year-on-year decreases up till the latest fiscal
year 2019. As for FY2019, BAT’s revenue is almost half of its peak at RM
2.5 billion while its net profits are down more than 60% to RM 343
million. Similarly, its Return on Equity has also trended significantly
lower over the past 4 years. This means the company is less efficient or
less capable to generate profits from the equity it employs.
Year
Assets (RM, mil)
Liabilities (RM, mil)
Equity (RM, mil)
Current Ratio
Debt to Equity (%)
2019
1,028
640
389
0.86
114%
2018
1,101
679
423
0.90
97%
2017
1,045
662
382
0.84
98%
2016
1,196
582
613
1.26
21%
Balance Sheet
Over a 4 years period, there has been a substantial decrease in Equity
(Assets – Liabilities) from RM 613 mil to RM 389 mil. This is due to a
decrease in its Assets and an increase in Liabilities during the period.
Its current ratio has also been trending downwards, latest at 0.86. The
current ratio indicates a company’s ability to repay short-term dues
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Operating Cash Flow & Dividend Payout
Trending with its decline in sales and profits, BAT's cash flow from
operations has also been on a declining trend in the 4 years period of
2016-2019. Also, with fewer profits, BAT’s dividend payout per share has
declined more than half from RM 2.78 per share in 2016 to RM 1.18 per
share in 2019. This is a classic example that higher dividend yields are not necessarily good.
In this case, a higher trailing dividend yield of 8.03% at the expense
of rapidly falling share prices and lower dividends distributed per
share. Future Prospects for BAT
The fall of BAT did not happen overnight. But the turning point for BAT
was the 30% increase in excise duties for cigarettes in Nov 2015 (after
a 12% hike in 2014). When cigarette prices in the market increased
suddenly, this encourages smokers to move towards the cheaper illicit
cigarettes. Based on BAT’s 2019 annual report, it is estimated that the
legal industry volume has halved post-2015 and the illegal cigarette
trade is standing at 68% of the total consumption volume. This means
that approximately 7 out of 10 packs of cigarettes sold or consumed in
Malaysia today are illegal. Putting aside BAT’s interests, illicit
cigarettes have caused approximately RM 25 billion loss in government
tax revenues since 2015. Apart from illicit cigarettes, BAT also faces
other challenges like the rise of vaping, ban of public place smoking
and SST led pricing.
Based on its latest financials presentation, there are 4 key areas that BAT will be working on:
Move the government for action
Intensify enforcement to crackdown illicit trades
Drive commercial growth within the legal segment
Drive growth across all 3 product segments (premium, aspirational premium and value-for-money)
Drive opportunity for new revenue pool
Regulate vaping and expand further tobacco heating product
Stabilize and energize a new organizational model
Lean organization to reduce cost
Despite initiatives to crackdown illicit cigarettes, it has been
recording double-digit increase year-on-year for the past 5 years. Hence
unless there are drastic and firm measures, it is difficult to see the
situation improving.
The ROTHMANS brand under the value-for-money segment for BAT has good
growth, doubling its market share in just about a year. At this moment,
this gain was not at the expense of BAT’s premium segment so this is a
positive sign.
A change in trend also sees smokers shifting their preference to either
vape or tobacco heating product like e-cigarettes. BAT has its own
non-combusted tobacco product called GLO. Due to the proclaimed less
harmful proposition, it is touted as a “healthier” alternative. Verdict
All in all, the make or break factor of BAT's prospect would rest
heavily on the illegal cigarette trade. Without any clear indications on
how to improve the situation, it is foreseen that BAT will have
troubles to catch up with its sales and profits. It is difficult to find
any long-term value in BAT at this moment. Again never jump into
dividend stocks solely base on the high dividend yield. Rather, it is
far better to go for reasonable but steadily growing yield returns
instead.
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