Overview of British American Tobacco Bhd

British American Tobacco (BAT) is a key player in the consumer staples sector, specializing in cigarette manufacturing and marketing. The company’s flagship brands include Dunhill, Peter Stuyvesant, and Rothmans. Despite its dominance in the industry, BAT faces persistent challenges due to higher costs, regulatory changes, and shifting consumer preferences.

With a share price of RM7.29 and a target price of RM6.96, the stock is rated as HOLD, reflecting a downside of -4.5%.

2024 Financial Performance

BAT’s 2024 financial results came in broadly in line with expectations. Core net profit for the year stood at RM183 million, marking a 6.0% year-on-year (yoy) decline. While revenue remained relatively flat at RM2,315 million (+0.2% yoy), the company’s margins were under pressure due to unfavorable foreign exchange rates, higher taxes, and increased provisions for returned sales.

Key highlights include:

• Revenue: RM653 million in 4Q24, up 7.1% quarter-on-quarter (qoq) and 2.7% yoy, primarily driven by seasonal sales.
• Gross Profit: Declined 4.7% yoy to RM541 million, with a margin of 23.4% (-1.2 ppt yoy).
• Net Profit: RM183 million for 2024, with a margin of 7.9% (-0.5 ppt yoy).
• Dividend: A total dividend of 59 sen per share was declared for 2024, down from 63 sen in 2023.

Key Financial Metrics

The company’s financial metrics reveal some challenges in maintaining profitability amidst rising costs and regulatory hurdles:

Stock Impact

The recently announced regulations on nicotine products present a mixed bag for BAT. On the positive side, the nicotine limit of 35mg per ml, which will be further lowered to 20mg from October 2025, levels the playing field for all products. This is expected to benefit BAT as the largest player in the market. However, the immediate implementation might lead to market dumping of non-compliant products.

Additionally, restrictions on the display of nicotine products may hinder marketing efforts for both traditional cigarettes and vaping products, posing another challenge to BAT.

Marketing and Earnings Outlook

Marketing expenses are expected to ease in 2025 due to the ban on sponsorship, advertising, and promotion of vapour products. This aligns with BAT’s strategy to temper its aggressive marketing for the Vuse brand. While growth in the vaping category is anticipated, the trajectory is expected to be gradual.

BAT has revised its 2025 earnings upward by 5.7%, primarily due to reduced marketing costs. However, 2026 earnings projections remain largely unchanged. By 2027, earnings from Vuse are expected to contribute meaningfully to the company’s bottom line.

Valuation and Recommendation

BAT is maintaining a HOLD recommendation with an unchanged target price of RM6.96. This target price implies a 12.7x PE for 2025F, slightly below the five-year historical average. Despite uncertainties in the cigarette market, the stock remains attractive due to its strong dividend payouts, offering a yield of 7-8%.

Environmental, Social, and Governance (ESG) Updates

BAT has outlined ambitious ESG goals to align with global sustainability practices. Key initiatives include:

Environmental

• Achieving carbon neutrality across Scope 1 & 2 by 2025.
• Reducing general waste by 15% and recycling at least 95% of waste by 2025.
• Ensuring 100% of plastic packaging is reusable, recyclable, or compostable by 2025.

Social

• Increasing the proportion of women in senior teams to 40% by 2025.

Governance

• Maintaining a board gender diversity ratio of 7:3 (male to female).
• Ensuring a balanced mix of board tenure and experience.