British American Tabacco (M) Bhd
(March 29, RM45.44)
Maintain hold with a target price (TP) of RM48.10: According to a report by a local English daily, Deputy Health Minister Datuk Seri Dr Hilmi Yahaya had stated that the government was considering increasing cigarette prices in the near future. He stated that cigarette prices could be raised to RM21.50 per pack from RM17 per pack currently, which would be a 26.5% increase. Besides increasing cigarette prices, the government may also increase the legal age required to purchase cigarettes to 21 from 18 currently. Furthermore, the government is also planning to introduce plain packaging boxes as a method to deter smoking.

In the past, the government has always raised cigarette prices via higher excise duties and this move has resulted in lower sales volumes of legal cigarettes within the industry. To recap, the government last revised excise duties by 40% in November 2015. As a result, British American Tabacco (M) Bhd’s (BAT) sales volume declined by 27.8% year-on-year in 2016. This was on the back of the group raising the selling prices for its premium brands and value-for-money segments by 23.5% and 26% respectively. This could also lead to a spike in illicit trade volumes, which stood at 51.2% in the fourth quarter of 2016.

Based on our estimates, a 5% decline in BAT’s sales volume will negatively affect our financial year 2017 (FY17) to FY19 forecast earnings estimates by 5.2%. This is assuming that the net increase in average selling prices is equivalent to the quantum of excise duty hike.

Pending an official announcement on this matter, we hold off from making changes to our earnings estimates. We maintain our “hold” call, with an unchanged dividend discount model-based TP of RM48.10. Although declining volumes remain an underlying concern, we expect better profitability from outsourcing its production. Dividend yields are also attractive at 5.4% to 5.8% for FY17 to FY19. — CIMB Research, March 28