Malaysia: Muted Price Hike Impact

Source from:  The Tobacco Journal 11/07/2014

British American Tobacco Malaysia's (BAT) shares closed flat at RM67.86 yesterday, after an early surge, following the group's move to raise cigarette prices effective yesterday.

At the market close, its shares on Bursa Malaysia remained unchanged from Tuesday with 96,900 shares traded at between RM67.60 and RM68.10.

BAT increased its cigarette prices by RM1.50 for its 20-stick packs, applicable to both premium and value-for-money brands.

The hike, according to BAT, was due to a 12 per cent increase in excise duty by the government on November 1.

BAT's brands such as Dunhill, Benson & Hedges and Kent are expected to be sold at RM13.50 (from RM12), Lucky Strike and Rothmans at RM14 (from RM12.50), and Pall Mall and Peter Stuyvesant at RM12 (from RM10.50).

The other two tobacco players JT International Bhd (JTI) and Philip Morris International (PMI) Malaysia are expected to raise their prices this time around.

In September, PMI held its ground and maintained its prices after BAT and JTI announced increases in cigarette prices at RM1 a pack, citing inflationary pressure as the reason.

BAT, however, reverted to its old prices "to maintain competitiveness". JTI followed suit, reverting to its old prices the following week.

Meanwhile, Hong Leong Investment Bank rated the tobacco industry a "hold" on post-earnings revision with the target price reduced to RM63.20 based on discounted cash flow valuations.

"This (the price hike) is not a surprise, given that we did not dismiss any potential off-Budget excise duty hike. Quantum of increase, however, was not disclosed but we estimate it to be RM0.30/kg at most."

"We believe this will further punish the legal players (BAT, JTI and PMI) and benefit the illicits as the price gap widens further. As such, total industry volume could potentially decline at a larger quantum. We also believe the market share of illicits could return to a rising trend."

"We tweaked our volume forecast lower, expecting a double-digit decline in FY15 and a slight recovery in FY16. As such, FY15-16 earnings per share is reduced by 8-16 per cent," said the firm.

Other analysts were mixed on BAT, with AmResearch maintaining its "hold" call on the stock with an unchanged fair value of RM70.60 per share; Affin Hwang Investment Bank maintained its "reduce" rating with a slightly higher target price of RM63.40; and Kenanga Research put its call and price target under review pending further information. Enditem