BAT rises 1.2% sen on unexpected hike in cigarette price

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KUALA LUMPUR (September 8): British American Tobacco (Malaysia) Bhd (BAT) saw its share price rising 1.2% in morning trades, as it lifted its cigarette prices by RM1.00 per pack effective today.

At 10.40am, BAT was traded at a high of RM72.18, up 88 sen, with 200 shares done.

According to its statement yesterday, a pack of 20s would go up by RM1 to RM13 for the Dunhill, Benson & Hedges and Kent cigarette brands.

Similarly, Lucky Strike and Rothmans brands would cost RM1 more at RM13.50 per pack, while the Peter Stuyvesant and Pall Mall cigarette range would cost RM11.50 a pack.

In a note today, CIMB Investment Bank Bhd said the price increase was unexpected, after the previous hike in September 2013 which had increased illicit cigarette market share by 4.5% to 38.9%, while the market share of the legal industry fell 17% year-on-year.

“While we believe the price increase will cause another plunge in industry volume in the immediate term, the price increase will have a net positive impact on BAT’s earnings as long as the sales volume does not fall more than 16%-17% which we think is unlikely,” the research house said.

CIMB said that it did not expect consumers to switch to illicit cigarettes, if legal alternatives from JT International (JTI) and Philip Morris International (PMI) were maintained at RM12 and RM10.50 per pack for premium and value-for-money segments respectively.

“However, we should see pricing differentials disappear in a short time frame as JTI and PMI have historically matched BAT’s pricing,” CIMB added.

The research house maintained “reduce” on BAT, with a higher target price (TP) of RM63.80, compared to RM58.10 previously.

Meanwhile, Hong Leong InvestmentBank Bhd (HLIB) believed the price hike would “punish” the legal market, and would benefit cheap whites and illicit cigarettes due to the widened price gap.

“Despite no similar announcement by JTI and PMI, we believe that the two players would also follow suit. Recall that these two remaining players hike their prices shortly after BAT’s previous price increase,” it said.

However, the research house said the group could benefit from margin expansion, as the price increases were “usually more than enough to offset higher costs and/or higher duty”.

The research house maintained “hold” on BAT, with an unchanged TP of RM68.54.