British American Tobacco Malaysia: Still Too Early To Turn Positive

Summary

• Illegal cigarettes continue to be the key headwind for BAT Malaysia, as their market share in Malaysia hit a new peak of 68% in 2019.
• Potential re-rating catalysts for BAT Malaysia are regulatory in nature, which include more effective enforcement actions and the legalization of vaping in the country.
• However, these catalysts are likely to take a longer-than-expected time to be realized, with a new prime minister and coalition government recently put in place in Malaysia.
• BAT Malaysia currently trades at 10.7 times consensus forward FY2020 P/E and offers a consensus forward FY2020 dividend yield of 8.9%.
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Elevator Pitch

I maintain my "Bearish" rating on Malaysia-listed cigarette manufacturer and distributor British American Tobacco Malaysia (OTC:BATMF) [ROTH:MK], or BAT Malaysia. BAT Malaysia is a 50%-owned subsidiary of British American Tobacco Plc (BTI), and the company has a 54.4% market share of the Malaysian legal cigarette market in 4Q2019.

Illegal cigarettes continue to be the key headwind for BAT Malaysia, as the market share of illegal cigarettes in Malaysia hit a new peak of 68% in 2019. Potential re-rating catalysts for BAT Malaysia are regulatory in nature, which include more effective enforcement actions and the legalization of vaping in the country. However, these catalysts are unlikely to be realized in the near-term, considering that a new prime minister and coalition government have only been recently put in place in Malaysia. Various government agencies could potentially see changes in key appointments, which would slow the pace of any positive regulatory changes.

This is an update of my prior article on BAT Malaysia published on November 17, 2019. BAT Malaysia's share price has declined by -28% from RM17.18 as of November 14, 2019 to RM12.36 as of March 2, 2020 since my last update. BAT Malaysia currently trades at 10.7 times consensus forward FY2020 P/E, which represents a significant discount to its historical three-year and five-year average forward P/E multiples of 17.1 times and 17.7 times respectively. The stock also offers a consensus forward FY2020 dividend yield of 8.9%.

Readers are advised to trade in BAT Malaysia shares listed on the stock exchange of Malaysia with the ticker ROTH:MK, where average daily trading value for the past three months exceeds $4.5 million and market capitalization is above $800 million. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage, such as Interactive Brokers, Fidelity, or Charles Schwab, or local brokers operating in their respective domestic

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.