- The tussle over the inclusion of tobacco in the Trans-Pacific Partnership Agreement (TPPA) appears to be over as the Health Minister Datuk Seri Dr S. Subramaniam was quoted in a local daily as saying that the government has made a proposal to carve the sector out of the proposed TPPA.

- This decision, which comes amid numerous points of contention, essentially means that tobacco will be removed from the list of goods that can be brought into the country under the TPPA.

- The TPPA is a trade agreement sponsored by the United States and is presently being negotiated by 12 countries with the objective of increasing and facilitating free trade of goods and services.

- Its three core issues, as highlighted by The Edge Financial Daily, include:- (1) building a level playing field, (2) deregulating industries; and (3) unlocking more businesses for competition. The partnership is set to create a duty free market of 800 million people with a combined GDP of US$27.5tril (RM85.3tril).

- Anti-tobacco campaigners, including the Malaysian Council for Tobacco Control (MCTC) and the Malaysian Medical Association (MMA), have been actively pursuing exclusion. While the former cited contradiction with the country’s signing of the WHO’s Framework Convention on Tobacco Control (FCTC) as a reason, the latter protested on health and social grounds.

- We believe that this decision will be neutral for the local tobacco manufacturers - British American Tobacco (BAT), JT International (JTI) and Philip Morris International Malaysia (PMI) - as we do not foresee any immediate resolution to the contentious issues. The more pressing problem for the sector would be the rapidly shrinking legitimate TIV pie.

- Legal TIV growth is expected to be flattish this year as the industry players need to battle: (1) perpetually high levels of illicits (estimated at 33.6% for March-May 2013); (2) proliferation of ELPCs; (3) threats of excise duty hikes; and (4) heightened regulations imposed by the local authorities and articles in the FCTC.

- Overall, we reiterate our NEUTRAL stance with a downside bias on the tobacco sector. We also maintain our HOLD recommendations on both BAT (FV:RM62.00/share) and JTI (RM7.20/share) for decent dividend yields of 4.5%-5%.

Source: AmeSecurities