- We maintain our HOLD recommendation on British American Tobacco (M) with a lower DCF-derived fair value of RM68.60/share.

- The press, quoting a statement by BAT, reported that the retail selling prices (RSP) of the group’s 20-stick packs will be raised by 30sen (+2.2% to +2.5%) effective today.

- This means that BAT’s premium labels, which include its flagship brand Dunhill, will now retail at RM13.80/pack while its aspirational premium brands, namely Pall Mall and Peter Stuyvesant, will be sold at RM12.30/pack.

- According to the press release, the hike was necessary in view of the 6% Goods and Services Tax (GST) introduced on 1 April 2015, and of which the group has been absorbing (albeit not the full amount given that GST is based on the RSP, which is higher than the ex-factory price on which the 5% sales tax it replaces is computed).

- Given the group’s previous attempts to pass on the GST impact, we are slightly surprised by this announcement. To recap, BAT had on 1 April 2015 announced a price increase of 50sen/20-stick pack for all its cigarette brands in tandem with the GST rollout. Just two weeks after, the group decided to reduce prices by 20 sen/pack for an effective increase of 30 sen/pack.

- However, barely a week later, the group had reverted to its pre-GST prices of RM13.50/pack for the premiums and RM12.00/pack for the aspirational premiums, citing competitive pressures for the reversal. Note that both Philip Morris International (PMI) and JT International (JTI) had maintained prices once each in BAT’s last two attempts (Sept 2014 and April 2015) to be the price leader.

- Following this, we are unsure if BAT’s peers will follow suit with its latest price hike although some retailers have indicated that they will. The cigarette manufacturers now appear to be competing on price to capture a larger share of the shrinking legal TIV pie (FY14: -4.4% YoY).

- In our opinion, the price hike may have been needed to support BAT’s margins. We are not surprised if the group had lost market share and experienced margin compression in the current quarter (2QFY15) due to the price differentials with its peers, downtrading activities, and cost of absorbing the GST.

- Incorporating the new RSP, lower legal TIV and margin contraction of ~1ppt, our FY15F-FY17F earnings estimates are reduced by 1% to 3%. With the recent downtrend of its share price in line with the broader market’s movements, BAT’s average forward yields of 5.4% are more attractive.

Source: AmeSecurities Research - 29 Jun 2015