RAM Ratings reaffirms AAA/P1 ratings of BAT Malaysia’s debt issues

Published on 10 September 2012

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. The Group remained the clear market leader in the local tobacco-manufacturing industry, with its share of domestic sales volume inching up 1.2 percentage points to 60.9% in 2011 (2010: 59.7%). Its flagship Dunhill remained the most popular local premium cigarette brand last year, with a 65.8%-share (2010: 65.6%) of this segment. The Group also garnered a significant 36.3%-share of the value-for-money segment (2010: 33.5%).

BAT Malaysia’s overall performance was relatively flat year-on-year (“y-o-y”) in FYE 31 December 2011 (“FY Dec 2011”), albeit still within expectations. Higher selling prices had offset the impact of lower volumes, with its top line climbing 4.1% to RM4.13 billion. Nonetheless, its operating profit before depreciation, interest and tax (“OPBDIT”) was largely unchanged at RM1.03 billion due to a full year’s effect of the withdrawal of 14-stick packs (which yield higher margins than 20-stick packs) and costs incurred in the change in its distribution model.

In 1H FY Dec 2012, the Group delivered a commendable performance, with growth in both top line and profitability. Its revenue edged up 3.7% y-o-y to RM2.11 billion on the back of a higher sales volume amid the absence of an excise-duty hike last year and the clampdown on extremely-low-priced cigarettes (“ELPCs”) sold below the floor price. Coupled with lower distribution costs and marketing expenditure, BAT Malaysia’s OPBDIT rose 11.5% y-o-y to about RM587 million. The Group’s adjusted funds from operations and operating cashflow debt cover ratios stayed above 1 time as at end-June 2012. “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.

Offsetting the abovementioned 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 eighth consecutive year in 2011, due to a particularly weak performance in the first half of the year following a steep 16% hike in excise duty on cigarettes in October 2010. In 1H 2012, however, total volume charted a marginal 0.6% y-o-y growth to 7.12 billion sticks amid the absence of an excise-duty hike last year.

While the incidence of trade in illicit cigarettes had reduced slightly from 36.3% in 2010 to 36.1% in 2011, illegal cigarettes still accounted for a significant portion of local tobacco consumption. Apart from illicit cigarettes, ELPCs are expected to remain a threat to the 3 major domestic tobacco manufacturers – BAT Malaysia, JT International Berhad and Phillip Morris Sdn Bhd – especially if the price differential between ELPCs and VFM as well as premium cigarettes widens due to increased excise duties without a corresponding adjustment to the floor price.  

Media contact

Woon Tien Ern

(603) 7628 1040

tienern@ram.com.my