British American Tobacco (BAT) reported a mixed performance in the first half of fiscal year 2024, with its core net profit slightly below market expectations despite a notable improvement in the second quarter.
CGS International (CGS), in a note today, said the company’s core net profit for 2QFY24 stood at RM36.2 million, marking a 16.8% increase from the previous quarter but a 26.8% decline year-on-year.
Challenges and Opportunities
BAT faced challenges primarily driven by higher costs associated with vape products and a decline in sales of traditional combustible products. This led to a 1HFY24 core net profit of RM67.2 million, which fell short of both analyst and Bloomberg consensus estimates by 35% and 39%, respectively, for the full fiscal year 2024.
Despite these challenges, BAT remains optimistic about the upcoming quarters of FY24, anticipating an improvement in earnings. The company attributes this optimism to anticipated growth in private consumption and increasing demand for its vape product line, particularly Vuse.
Market Dynamics and Strategic Outlook
BAT observed a 5.3% year-on-year decline in total sales volume in 1H24, alongside a 1.5% drop in revenue, largely mitigated by the growth in vape product sales. The company highlighted a reduction in the incidence of tobacco black market activities, albeit marginal, indicating a stable regulatory environment.
Looking forward, BAT anticipates favourable economic policies and consumer sentiment drivers, including flexible EPF withdrawals, cash handouts to lower-income households, and increased civil servant salaries. These measures are expected to bolster demand for BAT’s products, particularly Vuse.
CGS maintains an Add rating on BAT, affirming confidence in its long-term prospects. The company’s current valuation at 10.6 times FY26F earnings per share is considered undemanding, reflecting a discount compared to its historical averages.
The target price of RM9.77, derived from a GGM-based valuation model, suggests significant upside potential from current trading levels.
Additionally, BAT’s strategic focus on expanding its vape product offerings and navigating challenges in the combustible product market underscores its resilience and adaptability. Investors are advised to monitor BAT’s upcoming management briefing scheduled for July 26 for further insights into its operational strategies and financial outlook.
While BAT faces headwinds in its traditional product segments, its strategic investments in vape products and anticipated economic tailwinds position it well for potential earnings recovery and growth in the coming fiscal years.
