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Wednesday, 14 February 2018 | MYT 12:00 AM

Illegal cigarette trade ‘a problem too big to ignore’

PETALING JAYA: Escalating illegal cigarette trade in Malaysia will continue to hurt the long-term prospects of the legal tobacco trade in the country, British American Tobacco (M) Bhd (BAT) warns.

The tobacco manufacturer, whose earnings have been under pressure in recent quarters, said in a statement yesterday that illegal cigarette trade in Malaysia has become too big to ignore.

“For the longer term, BAT remains concerned that the legal domestic market continues to suffer due to the escalating illegal cigarette trade in the country.

“Illegal cigarettes problem is too big to ignore and has become a societal problem that undermines not only the health agenda of the country with respect to smoking, but also on shareholders returns, jobs in legal industry as well as tax revenues that could be invested in the development of the country,” it said.

The group noted that illegal cigarettes incidence had risen to 58.3% in 2017 from 52.5% in the preceding year.

“This was primarily driven by the continued affordability pressure on consumers coupled with enforcement challenges on curbing illegal cigarettes trade,” BAT said.

The group said its volume recovery trend in the first half of 2017 stagnated in the second half of the year, mainly due to the market dynamics within the illegal cigarettes segment and the continuous growth of lower price segment within the legal market in the fourth quarter.

The group saw its earnings plunge 73.9% to RM78.2mil in the fourth quarter ended Dec 31, 2017, from RM299.1mil in the corresponding period in the preceding year on lower revenue and absence of a one-off income on land sale.

During the quarter in review, the cigarette manufacturer’s revenue fell 16.7% to RM700.2mil from RM840.6mil previously, and its earnings per share (EPS) fell to 28.40 sen from RM1.013.

The group proposed a fourth interim dividend of 43 sen per share, bringing the year to date total dividend payout to RM1.23.

In 4Q16, BAT registered a one-off income of RM159.46mil from the sale of its land in Petaling Jaya.

On a quarter to quarter basis for 2017, BAT managed to strengthen its position in the market, registering an increase of 0.3% to 53.9% market share in the legal market.

“Dunhill, the flagship brand of BAT, grew 0.7% market share to exit 2017 at 37.8% when compared to exit 2016,” BAT said.

“While legal market volume declined 3% versus the third quarter of 2017, BAT’s domestic volume declined at a lower rate of 1.1%,” it added.

For the cumulative period, BAT’s earnings fell 34.5% to RM479.69mil from RM732.1mil in 2016. Consequently, the group’s EPS fell to RM1.725 in 2017 from RM2.526 in the preceding year.

For the year in review, BAT saw its revenue fall 20% to RM3bil from RM3.8bil.

BAT attributed the decline in its revenue to domestic volume decline, cessation of contract manufacturing for exports as of Dec 31, 2016, and to a lesser extent, the growth of the lower price segment.

The group’s domestic and duty-free volumes for December 2017 year to date declined 14.2% from 2016, it said.

BAT managing director Erik Stoel said: “In spite of a challenging year, we managed to strengthen our position in the legal market via solid share growth at the end of 2017 compared to end of 2016 (+1.4% share growth to 54.6%) and stable volume with our flagship brand Dunhill, reinforcing our leadership in the premium segment. We also managed to take leadership in the Aspirational Segment via a solid performance of Peter Stuyvesant that grew to 7.5% in 2017.”

Stoel said despite all the positive developments that BAT had worked hard for, including introducing the value-for-money segment, the group continued to see illegal cigarette trade impacting its results.

“While we will work to improve our results on the back of our stronger business model, improved capabilities and a strengthened and competitive brand portfolio, any significant legal industry growth and as such our growth, will require big interventions and actionable solutions in reducing the illegal market. The truth is, illegal cigarettes is not just a challenge for the legal industry, it is a societal problem that fuels many other undesirable elements that should not be tolerated in the country”, said Stoel.

BAT’s shares rose 76 sen yesterday to close at RM32.88.