This article first appeared in The Edge Financial Daily, on November 5, 2015.
KUALA LUMPUR: Tobacco manufacturers Philip Morris (M) Sdn Bhd (PMI) and JT International Tobacco Sdn Bhd (JTI) are holding out on raising prices of their cigarettes, at least for now.
“Our prices remain unchanged for now, but for competitive reasons, we are unable to disclose information regarding our product pricing nor comment on our future business plans,” PMI corporate affairs director Ozan Ibrisim told The Edge Financial Daily yesterday.
When contacted, a JTI spokesman declined to comment on any potential price hike of its cigarette brands.
However, AmResearch Sdn Bhd in its note to clients yesterday said its channel checks indicated that JTI will be raising prices in two days.
“(We are) unsure of PMI’s move, although they (PMI and JTI) are both legally bound to raise prices by a minimum of RM2.60,” it added.
Yesterday, British American Tobacco (M) Bhd (BAT) raised the prices of all its cigarette brands by as much as RM3.20 per pack of 20 sticks, in response to the government’s move to increase the tobacco excise duty by more than 40%.
The market and analysts were taken aback by the quantum of the excise and BAT’s price hikes, both of which they said were unprecedented.
“Previous excise duty hikes had averaged at 12%, with the last largest increase (+36%) reported in 2005, while cigarette pack price increases averaged at 8% since 2000,” said AmResearch.
Hong Leong IB Research (HLIB Research) likened the move to the “the straw that broke the camel’s back”.
The research house said while the off-budget excise duty hike was expected, the magnitude of the hike was not.
“We believe this development will decimate the legal industry volume, which was down 11% year-on-year in the month of September. We expect the volume to decline further against the challenging economic backdrop and diminishing consumer spending power,” said HLIB Research.
Kenanga Research warned that the price increase will strengthen the illicit cigarettes trade.
“We turn negative on BAT as well as the legal tobacco industry as a whole as the illicit [cigarette] trade might grow by capitalising on the situation and thus pose a greater threat to the legal industry.
“To recap, the illicit market share [had been reduced by the authorities] from a high of 38.9% [as at] 2013 to 32.3% [as at] 2014,” said Kenanga Research in its note.
CIMB Research said despite the increase in prices, the impact on BAT’s bottom line is likely to be minimal. However, in terms of dividend yields, the research house is advising investors to switch to breweries.
“We advise investors to switch from tobacco to the brewers as they are safer dividend yielders. BAT’s dividend yield in financial years ending Dec 31, 2016 and 2017 is now below 5% compared with the brewers, which are yielding over 6%,” said CIMB Research.
The growing presence of vapes (electronic cigarettes) would also pose a challenge to BAT, said MIDF Research.
“In view of the massive price hike in cigarettes, there is a strong likelihood for some smokers to either switch to a cheaper brand, illicit cigarettes or shift to vapes as it is now arguably cheaper than smoking conventional cigarettes,” it added.
The market reacted negatively to BAT’s (valuation:1.5; fundamental: 1.35) cigarette price hike, with its shares closing down RM1.48, or 2.38%, to RM60.82 yesterday, bringing a market capitalisation of RM17.37 billion. The counter was the top decliner on Bursa Malaysia.
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