Asia: Smoky Outlook for Tobacco Sector Ahead

Source from:  The Sun Daily  06/04/2013

Alliance Research reiterated its sell recommendation on British American Tobacco Malaysia Bhd (BAT) with an unchanged target price of RM54.72 as it continues to view the tobacco sub-sector negatively.

The research firm believes that there are more headwinds ahead, including the potential hefty excise duty hike post 13th general election which will lead to a spike in illicit trade due to drastic cigarette price increase.

BAT announced a 3% price hike for all its cigarette brands starting from June 3, to mainly pass on higher costs to consumers. It views the news negatively for the tobacco sector and expect more bad news to come.

"We noted that JT International Bhd and Philip Morris International Malaysia (PMI) have not announced any price increase yet, following the price adjustment from market leader, BAT. If they decided to absorb higher costs internally, it will disadvantage BAT amid intense competition within the industry going forward," it said.

Maybank IB Research said BAT's surprise hike in cigarette prices is generally positive to earnings, for there is no corresponding tax hike for now, though this could feature in the upcoming Budget 2014.

It said industry volumes could however contract as a result. Maybank IB said assuming a 1.5% year-on-year volume contraction in 2014, the net positive impact on BAT's earnings is a muted 4% and 8% for JTI if it follows suit.

It said the industry outlook remains lackluster amid rising regulatory risk and the growing threat of illicit trades in the market.

"We maintain our earnings forecasts pending further clarity. The sector remains an underweight," it said. Enditem