KUALA LUMPUR: Hong Leong Investment Bank (HLIB) research recommends that investors "sell" their shares in  British American Tobacco (Malaysia) Bhd (BAT) amid a shrinking combustible tobacco market and growing vape product market in Malaysia.

The firm has lowered its target price for the company's stock to RM6.47 a share and cut its financial year 2024 and 2025 earnigs forecasts by 30 per cent and 34 per cent, respectively.

BAT's first quarter ended Mar 31, 2024 core net profit of RM32.3 million came below HLIB research and consensus estimates, at only 15 per cent of full-year forecasts.

The negative deviation was mainly attributed to weaker-than-expected combustible cigarette sales, driven by a higher illicit market share and intensified competition.

HLIB research said although the group introduced its Vuse brand in 2023, and the brand has achieved a strong sales milestone, it will still be a Herculean task for BAT's e-cigarette products to fully offset the sales decline from lower combustible cigarette sales.

"Notably, unlike the traditional combustible cigarette market, which has only three players in Malaysia, the vape market is highly fragmented," it said in its note.

"The expansion of the vape market at the expense of traditional cigarette market share has led to the dispersion of sales among multiple vape brand owners, thereby putting pressure on BAT's sales performance," it added.

HLIB research said BAT's earnings outlook remains challenging given the lack of robust earnings streams from new segments to fill the void left by the combustible cigarette segment.