KUALA LUMPUR: Most analysts have cut their financial year 2015 (FY15) and FY16 growth expectations for British American Tobacco (Malaysia) Bhd (BAT), as they expect a drop in its sales volume following a 30 sen hike in its cigarette prices yesterday.
While not surprised that BAT has raised its prices, TA Securities said the increase is less than the 6% goods and services tax (GST), compared with its premium brands’ rate of increase of 2.2% and its value for money (VFM) brands of 2.5%.
“This higher selling price was not a surprise as we have highlighted the risk of possible GST-related price hikes. As per GST rules, companies can increase the selling price that arises from inflationary pressure on input cost,” said the research house in a report yesterday.
TA Securities is cutting its earnings estimate for BAT by 2.1% and 4.2% for FY15 and FY16 respectively, after considering possible deterioration in legal cigarettes volume as consumers cut back on smoking in the short term, while demand may shift to the illicit market.
“In addition, with the generally weak consumer spending due to higher living cost, sales volume could be affected even more. Thus, we trim our sales volume assumptions from -6% to -7% in FY15 and -5% to -6% in FY16,” it said.
TA Securities is maintaining a “hold” call on the stock, with a lower target price of RM67.13.
Similarly, MIDF Research expects the price hike to slightly impact BAT’s earnings for FY15 and has revised downwards its revenue and earnings forecasts for the year by 1.1% and 3.4% respectively.
The research house said the cut in forecasts was due to the possibility of a drop in near-term volume to competitors.
Despite the cut in forecasts, MIDF Research has upgraded its call on BAT to “buy” with a target price of RM72.82, in view of the recent weakness in the group’s share price.
In contrast, AllianceDBS Research has revised upwards its forecasts for BAT, after the announcement of the price hike. It said that the hike had partly addressed concerns of margin compression after the group had reverted to pre-GST prices in April.
This is the second time BAT has increased the selling price of its cigarettes in 2015, after the group announced a 50 sen hike in early April which was subsequently reverted to pre-GST prices two weeks later.
“We revised up (our) FY15 to FY17 earnings (for BAT) by less than 5% after reflecting the combined effects of higher average selling price of cigarettes, and some bookkeeping adjustments,” AllianceDBS Research said.
The revised forecasts came with a ratings upgrade to “buy” from “hold” and a higher target price of RM66.34, from RM65.15 previously.
When contacted by The Edge Financial Daily yesterday, JT International Bhd (JTI Malaysia) said it will maintain the price of its products for now.
“The prices of our products — Mevius, Winston and Camel — remain unchanged for now,” said JTI Malaysia in an email reply.
Philip Morris (Malaysia) Sdn Bhd said it is unable to disclose information on its product pricing and declined to comment on the matter.
On Sunday, BAT (fundamental: 1.55; valuation: 1.7) had announced a 30 sen increase for its premium and sub-premium cigarettes including Lucky Strike Plain, Dunhill, Kent, Benson & Hedges, Pall Mall and Peter Stuyvesant effective yesterday.
BAT shares rose 36 sen or 0.6% to close at RM60.86 yesterday, bringing its market capitalisation to RM17.28 billion.
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This article first appeared in The Edge Financial Daily, on June 30, 2015.