KUALA LUMPUR (Nov 4): Hong Leong IB Research has donwgraded British American Tobacco (M) Bhd (BAT) at RM62.30 with a lower target price of RM53.30 after BAT had announced that it will be raising its cigarette prices by up to RM3.20/20-stick pack for its premium and value-for-money (VFM) brands effective today.

In a note today, the research house said whilst it did not discount an off budget excise duty hike, it did not anticipate that the excise duty hike to be of this magnitude.

It said the quantum of the increase in prices was unprecedented; premium brands will be raised by 23.2% (RM13.80 to RM17.00) while VFM brands will have a larger price hike impact of 26.1% (RM12.30 to RM15.50).

“We believe this development will decimate the legal industry volume, which as it stands is 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. We anticipate Illicit and the vaping industry to benefit.

“Target price is decreased to RM53.30 based on DCF valuations.

“We downgrade our call to Sell as we price in the heightened regulatory risk to better reflect the headwinds BAT faces from price based substitution to illicit and p vaping. FY16-17 EPS cut by 7-8%,” it said.