- The Wall Street Journal today reported that the US, Japan and 10 other countries in the Pacific have reached a deal to lower trade barriers to goods and services under the Trans Pacific Partnership Agreement (TPPA). It is the world’s largest free trade agreement, involving two-fifths of the global economy. The deal still has to be ratified by the twelve countries involved.

- While details of the deal and Malaysia’s participation remain sketchy, we gather that the agreement has built in protections for tobacco measures, a move spurred by Malaysia’s proposal for a full carve-out of tobacco from the TPPA back in Aug 2013.

- SEATCA and various public health organisations had supported Malaysia’s proposal, reasoning that:- (1) trade and investment agreements are widely used by tobacco players to challenge government measures consistent with WHO’s FCTC and rally government’s support for challenges of tobacco control measures; (2) the ensuing litigation to defend those measures would drain government resources; and (3) the tobacco industry lobbies for stronger rules to protect its own commercial interests.

- We understand that the present deal includes an exemption of the Investor-State Dispute Settlement (ISDS) mechanism for tobacco - a major point of contention - as the US had formally proposed an exemption last week, signalling a change in its stance from when negotiations began in 2008.

- The ISDS essentially allows investors to take governments to arbitration and is currently being used by tobacco multinationals like Philip Morris to sue Australia and Uruguay over packaging regulations.

- We view this development as neutral for BAT as legally, it remains status quo. While regulations are a threat to the domestic tobacco industry, a more pressing problem for the sector would be the rapidly shrinking legitimate TIV pie.

- We are leaving our FY15F-FY17F earnings estimates unchanged for now pending BAT’s 2QFY15 results announcement and newsflow from the upcoming Budget 2017 tabling. Our HOLD call and DCF-derived fair value of RM68.60/share are also maintained.

Source: AmeSecurities Research - 7 Oct 2015