British American Tobacco (Malaysia) Bhd
(Nov 10, RM68.10)
Maintain “hold” with an unchanged discounted cash flow-based target price (DCF-TP) of RM64. Japan Tobacco International (JTI) and Philip Morris Sdn Bhd raised prices by RM1.50 per pack of cigarettes as well.

Our forecasts assume 10% contraction in 2015 industry volumes (a decrease of 6% in 2014).

Maintain “hold” on British American Tobacco (Malaysia) Bhd (BAT) with an unchanged TP of RM64, and a dividend yield of  more than 4% provides support.

Unlike the previous round in September 2014 when BAT raised cigarette prices by RM1 per pack but had to backtrack when one of its competitors maintained its prices, the price increase this round is unanimous.

All three players have now raised the price of a 20-stick pack to RM12 to RM13.50 from RM10.50 to RM12.

This is the third price increase in just over a year, totalling RM3.50 per box. The latest price hike of RM1.50 per pack is to compensate in part for a 3 sen per stick excise duty hike (an increase of 12%) to 28 sen per stick, or 60 sen per box.

As a gauge cigarette prices jumped 18% to 21% when the excise duty was raised by 14% in September 2013 and year-to-date (YTD) industry volumes (to September 2014) have contracted 7%.

We now assume larger 10% contraction (down 5% previously) in industry volumes for 2015 (down 6% for 2014).

Our forecasts are unchanged, having already imputed the respective variables.

Overall, we expect a net positive impact on BAT’s earnings from this recent price hike, for it would mitigate some of the cost pressures amid falling export volumes.

Having factored in the price hike, higher excise duty, and industry volume contraction, we had recently raised BAT’s financial year 2014 (FY14), FY15 and FY16 earnings by 3% (two-month impact), 11% and 6% respectively. — Maybank Research, Nov 10

This article first appeared in The Edge Financial Daily, on November 11, 2014.