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This article first appeared in The Edge Financial Daily on September 13, 2018

KUALA LUMPUR: Tobacco companies have increased cigarette prices by 1% to 4%, after the government imposed the sales and service tax (SST) on Sept 1.

A check with various retail stores showed that cigarette prices under the SST regime have gone up by between 20 sen and 50 sen, translating into an increase of 1.18% and 4.35%, respectively.

A 20-stick cigarette pack of Dunhill and Mevius now costs RM17.50, compared with their earlier retail price of RM17. The price of a 20-stick Winston pack has gone up by 50 sen to RM16 from RM15.50 and RM12 from RM11.50 for a LD pack. The Marlboro, L&M and Chesterfield, meanwhile, will now cost 20 sen extra at RM17.20, RM15.70 and RM12.20 per pack, respectively.

Notably, across all segments, both British American Tobacco (Malaysia) Bhd (BAT Malaysia) and JT International Bhd’s (JTI Malaysia) cigarette prices increased by 50 sen (2.94% to 4.35%), while those of Philip Morris (Malaysia) Sdn Bhd’s (Philip Morris Malaysia) brands are up by 20 sen (1.18% to 1.67%).

UOB Kay Hian Malaysia research head Vincent Khoo estimated that volume sales of the duty-paid market could be negatively impacted by low-to-mid single digits, as the price gap between the duty-paid and contraband cigarettes widens further.

“The financial impact on BAT Malaysia (whose brands include Dunhill and Rothmans) would be worse as BAT Malaysia’s volume and margins could be also impacted by market share loss and downtrading in the duty-paid market, arising from rival Philip Morris Malaysia’ decision to absorb some of the sales tax hike,” Khoo told The Edge Financial Daily yesterday.

He added that it would be difficult to quantify the impact on BAT Malaysia at this point of time as the research house takes into account the duration of Philip Morris Malaysia maintaining its pricing discount, and as most smokers tend to be “sticky” to their brands in the interim period.

Khoo also noted from recent precedent where Philip Morris Malaysia, whose brands include Marlboro, L&M and Chesterfield, has raised prices at a lower quantum, forcing rivals BAT Malaysia and JTI Malaysia to eventually follow suit and lower their selling prices. JTI Malaysia’s brands include Mevius, Winston and LD.

MIDF Research analyst Noor Athila Mohd Razak concurred, saying that generally, any increase in cigarette prices is negative for tobacco companies as it will result in lower demand for legal cigarettes.

“That said, the illicit cigarettes’ market share has reached an all-time high of 63% and we opine that any increase in prices at this point in time will further exacerbate the current condition with the illicit cigarettes,” she added.

Nonetheless, she believes that the reintroduction of Rothmans and the new capsule line for both Rothmans and Dunhill should be able to cushion the impact from the increase in prices. “Hence, we do not think the increase in prices will significantly impact BAT Malaysia’s earnings,” she added.

She added that the research house is comforted by the fact that BAT Malaysia’s value-for-money brand Rothmans, which was reintroduced in fourth quarter of 2017, remains the fastest-growing brand. “We opine this will assist in sustaining its position as a market leader in legal cigarettes.”

Noor Athila also pointed out that the launch of capsule line for both Rothmans and Dunhill shows BAT Malaysia management’s commitment to making sure that it continues to create brand awareness to entice customers to switch to legal cigarettes and drive volume growth.

Affin Hwang Capital analyst Lester Siew said the legal tobacco industry’s sole catalyst for an earnings revival is Pakatan Harapan’s political will and fiscal motivation in undertaking a massive clampdown on the illicit cigarette trade.

However, he views that enforcement efforts are unlikely to have an impact this year.

Siew said BAT Malaysia’s brands have become the least price-competitive, despite its 50 sen increase being sufficient to maintain profit margins based on its previous estimation.

Noting that there seems to be a “trend between the quantum of the price increase and the decline in legal tobacco volumes”, Siew noted that the price increases this time are at the lower end of the scale historically, which suggests that the volume impact this time around will also be less imposing.

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