MIMB Starts Coverage of BAT with 'Hold' Call

Source from:  Business Times Malaysia 05/11/2009

MIMB Research has initiated coverage on British American Tobacco (Malaysia) Bhd (BAT) (4192) with a "hold" recommendation and a RM44.40 price target. The local research firm said there are several challenging issues facing the local tobacco industry, including contraband and illicit trade cigarettes. "These issues, in our view, may dampen the performance and affect the survival of the big three tobacco companies in Malaysia including BAT. We note that the exceptionally low-priced cigarettes (ELPC) segment continues to retail at below market price and this could lead to a price war between BAT and its rivals," it wrote in a report dated May 8 2009. It said the government's move to impose pictorial health warnings and strict descriptions on cigarette packs could also slow down consumption by consumers who may be turned away by these disturbing images. Additionally, more regulatory constraints by the government, in line with its anti-smoking campaign like banning smoking in public places, may dampen consumers' interest in smoking. "If this elevates to a higher degree, the total industry volume (TIV) of tobacco would be at threat and under pressure. However, a moderate increase in excise duty with the introduction of minimum price per pack would save the industry from declining further," said MIMB. BAT saw its net profit increase by 10 per cent to RM811.7 million for its fiscal year ended December 31 2008, despite the challenging economic environment. "Given the potential challenges faced by the company, we are cautiously optimistic of BAT from financial year 2009 onwards," said MIMB. Still, given that BAT, which produces brands like Dunhill, Kent and Pall Mall, controls 59.8 per cent of tobacco's retail market, MIMB expects loyalty towards its brands to continue in the foreseeable future. Enditem