RAM Ratings reaffirms BAT Malaysia's AAA/P1 ratings

Published on 07 July 2011
RAM Ratings has reaffirmed the AAA/P1 ratings of British American Tobacco (Malaysia) Berhad’s (BAT Malaysia or the Group) RM100 million Commercial Papers/Medium-Term Notes Programme (2007/2014). At the same time, the AAA rating of the Group’s RM700 million Medium-Term Notes Programme (2007/2020) has also been reaffirmed. Both the long-term ratings have a stable outlook.

BAT Malaysia’s credit profile is supported by its entrenched market position and superior financial profile. Although its share of domestic sales contracted 0.6 percentage points year-on-year in 2010, the Group remained the clear leader with a 59.7%-share of the market. Its flagship Dunhill remained the most popular local premium brand last year, with a 65.6%-share (2009: 64.8%) of this segment. The Group also garnered a significant 33.5%-share of the value-for-money segment (2009: 33.7%). Despite the challenging landscape of the tobacco industry, BAT Malaysia’s adjusted funds from operations and operating cashflow debt cover ratios stayed superior at above 1 time as at end-December 2010.

Offsetting the above strengths are the increasingly difficult operating environment and regulatory risks of the local tobacco industry. The industry’s sales volumes are still vulnerable to excise-duty hikes and the proliferation of illicit cigarettes.

Industry sales volumes declined for the seventh consecutive year in 2010, following a steep 16% spike in excise duty last October. While the incidence of illicit cigarettes had reduced slightly from its peak of 37.5% in 2009 to 36.3% in 2010, they still accounted for a significant portion of local tobacco consumption. Despite the minimum pricing imposed on cigarettes last year, we understand that certain manufacturers of extremely-low-priced cigarettes have been selling their output below floor prices, in a bid to gain market share. Should this persist, the sales volumes of the 3 major domestic tobacco manufacturers – BAT Malaysia, JT International Berhad and Phillip Morris Sdn Bhd – may be affected.

At the same time, BAT Malaysia’s margins are expected to be squeezed by a full year’s effect from the withdrawal of 14-stick packs (which yield higher margins than 20-stick packs). Nonetheless, the Group’s profitability is viewed to remain commendable relative to its AAA-rated peers. “Looking ahead, we expect BAT Malaysia’s cashflow-protection measures to stay superior, supported by its well-established market position and strong brand equity,” opines Kevin Lim, RAM Ratings’ Head of Consumer & Industrial Ratings.

Media contact
Low Su Lin
(603) 7628 1071
sulin@ram.com.my