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British American Tobacco (Malaysia) Bhd
(April 20, RM67.38)
Maintain hold with a lower target price of RM69.50:
We maintain our “hold” rating on British American Tobacco (Malaysia) (BAT) with a lower discounted cash flow-derived fair value of RM69.50 per share, which implies a price-earnings ratio (PER) of 22 times.

 We have revised downwards our financial year ending Dec 31, 2015 (FY15) to FY17 earnings forecasts (F) by 2% to 3% following BAT’s move to completely reverse the price increase it earlier undertook to help mitigate the impact of the goods and services tax (GST).

Given that BAT is now fully exposed to the higher taxation payments (the GST of 6% is based on the retail selling price, which is higher than the ex-factory price on which the 5% sales tax is computed), we have assumed flattish earnings before interest, taxes, depreciation and amortisation  margins of approximately 27% moving forward for the group (one percentage point lower from our earlier forecast).

To recap, BAT on April 1, 2015, announced a price increase of 50 sen per 20-stick pack for all its cigarette brands in tandem with the GST rollout.

Two weeks later, the group then decided to reduce prices by 20 sen per pack for an effective increase of 30 sen per pack.

However, we understand that effective April 17, 2015 (barely a week from its 20 sen per pack price cut), the group reverted to its pre-GST prices, that is RM13.50 per pack for the premium (Dunhill) and RM12 per pack for the aspirational premiums (Pall Mall and Peter Stuyvesant). However, the lower prices may only have been reflected by retailers yesterday given potential technical delays.

In a press statement, the management said that the move was necessary to remain competitive, meaning that it was spurred by the pricing decision of its peers, especially JT International (JTI), which had opted to maintain prices. Philip Morris International had increased its cigarette prices by 40 sen per pack but we expect them to reverse this too.

The cigarette manufacturers now appear to be competing on price to capture a larger share of the shrinking legal total industry value (TIV) pie (FY14:  a decrease of 4.4%).

We note the present threats of illicit sticks (approximately 32% market share) and e-cigarettes. We have thus incorporated a larger legal TIV decline of 6.5% for FY15F and -4.3% for FY16F vis-à-vis our earlier pre-price hike assumptions of a decline of 6% and 4%.

Despite the group’s muted earnings growth and the lack of positive catalysts for the industry, we expect BAT’s share price to remain range-bound as it is generally held for its defensive attributes. At the current price, BAT’s yields are approximately 4.8%. — AmResearch, April 20

BAT

This article first appeared in The Edge Financial Daily, on April 21, 2015.

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