Potential Positives For BAT From US Vaping Ban

The imminent ban on vape products in the US over mounting health concerns could arrest the surge in local usage of vape products that may translate into a potential positive for British American Tobacco (BAT), according to Affin Hwang Capital.

The research house said the US authorities are planning a ban on the back of multiple vaping-related deaths and illnesses alongside an epidemic of youth usage in the country.

“Given the mounting health concerns, we believe this could arrest the surging local usage of vape products in the near-term. In tandem, this may benefit cigarette volumes and position heated tobacco products such as iQos and BAT’s upcoming Glo as safer smoking alternatives,” it said in a report.

Affin Hwang said the domestic situation is resembling the US as the public and local health authorities’ concerns over vaping’s health risks and teen usage are likely to escalate.

In Malaysia, unregulated new-generation vape products, most of which are nicotine-filled, have proliferated and it is estimated to account for an equivalent of 8-10% of Malaysia’s tobacco consumption, said the research house.

It said that this magnifies the issue of illegal smoking consumption (combined vaping and illicit cigarettes market share of 70%), while also nullifying a recent decline in smuggled cigarette volumes due to stricter enforcement activities by local authorities.

“Rising local awareness on the dangers of illicit nicotine products and looming oversight on vape and shisha products could disrupt the burgeoning vape market, and in turn potentially benefit the legal tobacco players’ cigarette volumes and reception of heat-not-burn products such as iQos and BAT’s Glo (launching in 4Q19).

“However, the former would be dependent on positive outcomes arising from the enforcement of illicit cigarettes and fake tax stamps, while the latter could be offset by stricter compliance requirements, amid the e-cigarette health crisis,” said Affin Hwang.

The US Food and Drug Administration (FDA)’s latest survey data saw a prominent rise of underage vaping – over a quarter of American high school students being active vape users, up from 20.8% in 2018.

Affin Hwang gathered that all flavoured vape products, aside from tobacco-flavoured ones, would soon be removed from US retail channels, until and if they receive subsequent authorisation from the FDA.

Following the recent collapse in BAT’s share price, as the tobacco manufacturer delivered a disappointing 2Q19 results hamstrung by the rise in fake tax stamps and vape products, – to a 20-year low, the risk-reward has once again turned favourable, viewed Affin Hwang.

“Even after trimming our 2020-21 forecast earnings by 5-6% to reflect our expectations of higher advertising & promotion and compliance costs due to Glo’s introduction to the market, price-to-earnings ratio valuations are at multi-year lows.”

With that, Affin Hwang upgraded its call on the stock to buy, albeit with a lower dividend discount model-derived target price of RM27.80 from RM30, previously. It noted that attractive dividend yields of 6.2%-7.1% are also on the cards at current levels.

Meanwhile, downside risks to BAT are weaker-than-expected enforcement outcomes, heightened competition from alternative products and a resumption of excise duty hikes.