This article first appeared in The Edge Financial Daily on October 18, 2018
British American Tobacco (Malaysia) Bhd
(Oct 17, RM33.58)
Maintain hold with an unchanged target price (TP) of RM32.22: Price increase by the end of October at the latest, no quantum announced. On Oct 16, various media reported that Health Minister Datuk Seri Dr Dzulkefly Ahmad announced cigarette retail prices are set to be raised by the end of October.
This is to account for the 10% sales and services tax (SST) implemented on Sept 1, 2018 in place of the goods and services tax (GST).
He added that the health ministry (MoH) is in the midst of finalising the prices.
According to Dr Zulkelfy, this is also in line with the Control of Tobacco Products Regulations 2004, which stipulates that any tobacco tax increase needs to be fully passed on to consumers.
An eventuality that has already been factored in.
Overall, we are neutral on this news as we had earlier expected a price hike to come into effect.
While historical evidence shows that any price hike by British American Tobacco (Malaysia) Bhd (BAT) would translate into a decline in sales volume, the group’s decision to recall its 50-sen per pack price increase on Sept 21 could affect its gross margin by around 2% the longer it maintains its prices, as it would have to absorb the SST charges on behalf of its customers.
Recall that BAT initially raised its selling prices by 50 sen per pack for all its products on Sept 5 — only to reverse the decision on Sept 21 after it emerged that there was a pricing difference among the Big Three tobacco players post-SST.
A risk if BAT raises prices by more than 50 sen per pack. We had previously assumed an increase of 50 sen per pack in our earnings estimates.
Hence, there is downside risk to our earnings in the event that the quantum of price increase breaches 50 sen per pack.
Conversely, there is an upside risk if the price hike is less than 50 sen per pack.
While BAT and competitor JT International Bhd (JTI, unlisted) had raised their selling prices by 50 sen across all product categories, Philip Morris (Malaysia) Sdn Bhd (unlisted) only increased its prices by 20 sen per pack. BAT and JTI have since reverted to their pre-SST prices in the interim, while Philip Morris continues to sell its products at the post-SST prices. — CGSCIMB Research, Oct 16