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July 19, 2007

High costs hit BAT’s profit
British American Tobacco (Malaysia) Bhd., the Southeast Asian nation's biggest cigarette maker, said second-quarter profit fell 2.3% as costs increased and the company lost sales to the country's growing illicit trade, Bloomberg reported.

Net income dropped to 178.5 million ringgit (US$52 million), or 62.5 sen a share, from 182.6 million ringgit, or 63.9 sen, a year earlier, the company said today in a statement. Delivering ``satisfactory'' 2007 results will be ``challenging,'' it said.

The owner of Dunhill and Pall Mall brands is fighting a growing market in illegal tobacco that British American says accounts for an estimated quarter of all cigarettes sold. The company was forced to raise prices this month after a 25 tax increase by the government, which some analysts say will drive more consumers to the black market.

``In the third quarter we'll have to see how this affects them,'' said Ng Yong Yin, an analyst at AmResearch Sdn. with a ``sell'' rating on the stock. It will push more consumers to illicit smoking, he said.

Shares of British American have fallen 6.4% this year, trailing the 26% gain by the Kuala Lumpur Composite Index. The stock dropped 0.6% to 40.5 ringgit on July 19, valuing the Petaling Jaya-based company at 11.6 billion ringgit.

Illegally imported tobacco is sold at thousands of cigarette stores across the country, the Royal Malaysian Customs Department said last year. The government is raising taxes in a campaign to wean smokers off their habit and encourage healthier lifestyles.

``The industry is facing a demanding period,'' Jack Bowles, British American's managing director, said in a statement.

Sales rose to 937 million ringgit last quarter, from 916.5 million ringgit as the company focused on its most profitable brands, British American said. Sales by volume across Malaysia's cigarette industry dropped 3.2%, the company said. Bloomberg

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