AmWatch - British American Tobacco : Pack prices raised by RM1.50 following 3sen/stick duty hike HOLD, 5 Nov 2014

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British American Tobacco  :  Pack prices raised by RM1.50 following 3sen/stick duty hike HOLD

We maintain HOLD on British American Tobacco (M) with an unchanged fair value of RM70.60/share. BAT announced that effective today, the retail selling prices (RSP) of its 20-stick premium and aspirational premium packs will be raised from RM12.00 to RM13.50 (+12.5%) and RM10.50 to RM12.00 (+14.3%), respectively. We understand that the price hikes are in response to the government’s move to increase the tobacco excise duty by 3 sen/stick (or +12%) beginning 1 Nov 2014. This brings the total tobacco excise duty to 28 sen/stick.

The current duty hike is similar to that of last year, when tobacco excise duty was raised by a 3 sen/stick (or +14%). A breakdown of the RM1.50/pack price increase shows that excise duty-related price accounted for 42% of the total increase. This is identical to that in 2013 but is much lower than the 90% in 2010 and 70% in 2009. Historically, the ratio of price increase to excise increase for a 3 sen/stick excise hike was ~1.3x (currently: 2.5x).

In view of the negative correlation between legal TIV and RSP, we now forecast legitimate TIV to contract by 9% for FY14F and 10% for FY15F (9M14: -7% for total industry; -7.6% for BAT). Note that the excise hike in 3Q13 had caused volumes to collapse by ~20% in the following quarter.

That said, we believe that BAT’s margins would remain intact as we believe the price increase is more than sufficient to absorb the impact of the duty hike. As it is, the group recorded a 1.6ppts expansion in its EBIT margin for 9M14 to lift its cumulative earnings by 12%. After imputing the higher excise duty, latest pricing structure and our downward revised TIV assumption, we have fine-tuned our FY14F-FY16F earnings forecast by -1% to +3%. While the other cigarette manufacturers, namely JT International and Philip Morris International are legally bound to raise their pack prices (by a minimum of 70sen), it remains to be seen if the hikes will be of a similar quantum.

Others :

Petronas Gas : Stable earnings with new GPTA  HOLD

Banking Sector : Jump in construction impaired loans in September 2014               NEUTRAL

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