Malaysia: Marginal Impact on BAT Seen

Source from:  The Star online  10/23/2012

The 20 sen increase in the prices of British American Tobacco (M) Bhd's (BAT) cigarettes will have a marginal impact on the tobacco company's earnings, according to analysts.
 
"We believe that BAT's volume will be affected by the hike albeit marginally, as smokers will opt for a cheaper source of cigarettes. Tracking back its historical trend since 2006, volume declined 0.7% for every 1% hike in price," said Hong Leong Investment Bank research head Low Yee Huap in a report.
 
RHB Research Institute analyst Lee Wee Sieng said while the magnitude of price hike was not steep – 2% and 2.4% for premium and value-for-money (VFM) cigarettes respectively – the increase was unlikely to dampen the legal total industry volume (TIV) in the near-term.
 
"While the price hike is not steep, we still view any form of price increase as negative for legal TIV and BAT. We are keeping our forecasts unchanged for the time being until we get a clearer picture from the management," he said.
 
The hike, effective yesterday, saw BAT's 20-stick premium and VFM cigarette prices increasing to RM10.20 from RM10 and RM8.70 from RM8.50.
 
According to BAT, the Royal Malaysian Customs has mandated an uplift in ex-factory pricing of the company's cigarettes of between 25% and 58%. "What this implies is that while tax rates remain unchanged, tax revenue collected will still rise as a result of higher selling prices," said Maybank Investment Bank analyst Chai Li Shin.
 
Chai added that the price increase of one sen per stick was moderate, compared with the three sen per stick increase in 2010 which raised prices by 7.5% to 9% per box.
 
"Hence any negative impact on sales volumes would be minimal," Chai said.
 
Alliance Research analyst Ian Wan pointed out that the one sen per stick price-hike did not take into account any potential volume loss, adding that he expected any market share loss to be limited.
 
He added that there could be another excise duty hike on cigarettes in the first six months of next year, after the general election, which could lead to poor earnings visibility in the second half of 2013.
 
"We believe the Government may not need to wait until Budget 2014 to announce any excise duty hike on cigarettes, especially as it needs to replenish its coffers in 2013 after the cut in export duty on crude palm oilfrom Jan 1, which can result in approximately RM1.5bil in tax revenue loss."
 
Wan also said it believed BAT's current compressed yield of 4.2% was not sustainable over the long term.
 
An analyst from a local bank-backed research said BAT's dividend yield performance would depend on its share performance.
 
According to Bloomberg data, BAT's indicated yield is at 4.09%, while that of JT International Bhd (JTI) is 3.81%. At 5pm yesterday, BAT fell 14 sen to RM63.86, while JTI shed three sen to close at RM6.82.
 
An analyst said the share-price drop (especially in BAT's case) was likely a knee-jerk reaction to the cigarette price hike.
 
CIMB Research analyst Foong Wai Mun in a report said a "knee-jerk" reaction was to be expected.
 
"While we expect knee-jerk reactions to share prices following the increase in tax payable and selling prices, decent dividend yields should also lend some support. We maintain earnings estimates pending clarification from management. We recommend a switch to the two brewers, our top picks."
 
Chai noted that the price hike could result in a greater upside to JTI's earnings compared with BAT, as the former's VFM-dominated product portfolio has a lower average price base.
 
Besides, BAT's earnings are less sensitive to price changes since contract manufacturing accounts for part of its revenues. Nevertheless, JTI's earnings growth could be bogged down by Winston's weakening market share and the rebranding of Mild Seven to Mevius."
 
Low expected the remaining two tobacco players, JTI and Philip Morris International to also raise the prices of their cigarettes.
 
"JTI would be harder hit as the VFM segment (which contributes 60% to 80% of its sales) experiences a higher percentage increase due to its lower base compared to the premium segment.
 
"Historically, JTI's market share has fallen at a larger quantum compared with BAT and we believe there will be downtrading into the cheap whites and/or illicit cigarettes." Enditem