Cigarrete price hike to punish legal market, benefit illicits, says HLIB Research

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KUALA LUMPUR (Nov 5): Hong Leong IB Research has maintained its Hold rating on British American Tobacco (M) Bhd (BAT) with a lower target price of RM63.20 after BAT announced that it will be raising its cigarette prices by RM1.50/20-stick pack effective today due to an increase in excise duty hike.

In a note today, HLIB said this was not a surprise given that the researc house does not dismiss any potential off-Budget excise duty hike.

It said the quantum of increase however was not disclosed but we estimate it to be at most RM0.30/kg.

“We believe this will further punish the legal market and only benefit the illicits as price gap widens further.

“As such, total industry volume could potential decline at a larger quantum. We also believe the market share of illicit could return to a rising trend,” it said.

HLIB said it opined that BAT may not enjoy the likelihood of margin expansion although the price increase are usually more than in the increase in excise duty hike as the additional cushion may be used to compensate the higher costs.

“We tweaked our volume forecast lower, expecting a double-digit decline in FY15 and a slight recovery in FY16. As such, FY15-16 EPS is reduced by 8-16%.

“Post-earnings revision, target price is reduced to RM63.20 based on DCF valuations. Maintain Hold,” it said.