KUALA LUMPUR: The local tobacco industry looks set to face yet another challenging year in 2015, as total industry volume is expected to continue to come under pressure, thanks — or no thanks — to the excise hike last month, which saw cigarette prices increase by RM1.50.

Rob Stanworth, managing director of JT International Bhd (JTI), which was privatised earlier this year and carries the Winston brand, thinks it is too early to tell what impact the recent excise and price increases will have on industry volumes, but admitted that volumes may fall.

“Based on past trends, it would be reasonable to expect volumes to be under pressure following an excise and price increase, especially with the uncertainty of consumer sentiment driven by inflationary pressures as well as illegal cigarette trading, which has been a long prevalent issue in Malaysia,” he said in an email reply to The Edge Financial Daily.

Neither JTI nor British American Tobacco (Malaysia) Bhd (BAT) — the latter is now the only listed tobacco outfit on Bursa Malaysia — wanted to provide a forecast on the anticipated volume drop, but analysts who track the sector are of the view that TIV will see a contraction of up to 10% this year, and a little more in 2015.

TIV has already fallen by 7% for the first nine months of this year. Note that following the excise hike in October last year, TIV fell by almost 17% year-on-year in the immediate quarter (4Q13).

Nonetheless, analysts are quick to point out that the higher selling prices are sufficient to offset for any drop in sales volume.

Indeed, even as most analysts have maintained their “reduce” and “hold” calls on BAT’s counter, many have raised their earnings forecast for the stock for financial year 2014 (FY14) to FY16 and increased their target prices following the announcement on the excise and price hikes.

One of them is CIMB Research, which observed in a Nov 5 note that “while sales volume will most likely drop substantially in the immediate term, we believe it will have a net positive impact on BAT’s FY15 earnings as long as sales volume does not fall more than 16% to 17%, which we think is unlikely.”

Affin Hwang Investment Management Bhd head of equity Gan Eng Peng, citing historic precedents, is also not expecting any severe demand destruction for tobacco.

In fact, he noted that BAT is one of the stocks that have done really well over the years despite constant price increases and tighter government regulation.

“It has been able to achieve this by passing the high cost of doing business down to its customers, which in this case have proven to be inelastic in terms of their demand,” he told The Edge Financial Daily.

“If better enforcement can be accelerated, there could be a sustained shift of buyers back to the legal market, making BAT one of the key beneficiaries,” he said.

The Confederation of Malaysian Tobacco Manufacturers, citing the latest Illicit Cigarette Study conducted by Nielsen, said there has been a 6.6% decrease in illegal cigarettes to 32.3% this year from a record high of 38.9% reported at end-2013.

This marks the largest decline in the history of illegal cigarettes in Malaysia in 20 years.

“The illicit market has improved, yes, but now, with the price hike, [I’m] not sure if the government can sustain its efforts. It might [just] go back to square one,” opined one analyst. She also thinks that at 32% to 35%, the levels are still “very high”.

Areca Capital Sdn Bhd chief executive Danny Wong cautioned that the goods and services tax (GST) to kick off in April, which may prompt a pick-up in consumption prior to it, will see a slowdown for about six months to a year after its implementation.

“Next year 1Q could [still] be okay to look at consumption stocks. But [from] 2Q onwards, consumption stocks may be affected and some investors may switch to other stocks, [like those] related to the Economic Transformation Programme,” Wong said.

“Tobacco will not be impacted that much as it’s a habit. But in terms of yield, there are many other choices. In a way, it hinges on the country’s interest rate outlook. If inflation stands at a manageable level and we are here to stay, there are other ‘yielders’ such as REITs and banking stocks,” he said.

Based on BAT’s closing share price of RM65.90 yesterday, and FY13’s dividend per share of RM2.82, it yields only 4.3%, while The Edge Research shows that the stock has a 12-month rolling yield of 4.8%.

It is also trading at 20 times price-earnings ratio (PER), based on its annualised FY14 earnings per share of RM3.34.

UOB Kay Hian head of research Vincent Khoo also envisaged resilient demand within the consumer sector next year, except for tobacco, habits notwithstanding.

“... we expect duty-paid cigarette volume to contract by 12% in 2015 following the aggressive excise-driven price hike of 12% to 14% in November 2014,” said Khoo in a strategy note this month.

He favours the brewery subsector instead, which he said has been sold down heavily by more than 30% since its peak in June last year.

Hence he, as well as a few other analysts, picked Carlsberg Brewery Malaysia Bhd — with its higher yield now — as a more attractive sin stock option.

“Positively, the brewery subsector should post moderate volume growth [mid single-digits] thanks to regulators’ effective anti-contraband efforts,” he said, adding that Carlsberg is trading at only 18 times forward PER, compared with Guinness Anchor Bhd’s 20 times.

Based on Carlsberg’s closing share price of RM11.78 last Friday and its FY13 dividend per share of 61 sen, it yields 5.2%.

This article first appeared in The Edge Financial Daily, on December 24, 2014.