British American Tobacco (M) Bhd
(Nov 5, RM67.86)
Maintain “reduce” with a higher target price (TP) of RM63.40: British American Tobacco (BAT) announced that it has raised its cigarette selling prices by RM1.50 per pack effective Nov 5, 2014. This is subsequent to the government’s off-budget initiative to increase the excise duty on tobacco by 12% (or up 3 sen per stick) to 28 sen per stick.
Although we had previously expected an excise duty hike, the quantum of the hike was higher than expected as we only factored in a moderate increase of 1.5 sen per stick in our forecasts.
BAT’s Dunhill and Kent brands will now retail at RM13.50 (from RM12) per pack while its value-for-money brands such as Pall Mall and Peter Stuvyesant will now sell at RM12 (from RM10.50).
Given the pricier cigarettes, we believe that the proliferation of illegal cigarettes would heighten as consumers turn to cheaper alternatives. Note that the illicit cigarette market grew to 39% (from 35%) of the total industry volume (TIV) in October to December after the price hike back in September 2013.
That said, given: i) more stringent efforts by the government to curb smoking; and ii) higher average selling prices (ASPs) which would further aggravate the illegal market, we are downgrading our financial year of 2014 to financial year of 2016 (FY14 to FY16) TIV to contract 4% to 10% for FY14 to FY16 (from a softer contraction of 2% to 8%).
We cut our volume assumption for BAT by 2% to 9% but input in the ASPs resulting in a 1.7% to 2% upgrade to our FY14 to FY16 forecasts.
Overall, we maintain our “reduce” rating on BAT with a slightly higher TP of RM63.40 (from RM62.40).
Despite its decent dividend yield of 4% over the next three years, risk reward is unfavourable, given that the group is operating in a fairly matured sector with no immediate rerating catalysts in the medium term.
Key risks to our view include: i) stronger-than-expected sales volume growth; and ii) lower-than-expected operating expenses. — Affin Hwang Capital, Nov 5
This article first appeared in The Edge Financial Daily, on November 6, 2014.