Highlights

Dunhill have launched a new product line, known as Dunhill Kretek (shown in Figure 1. According to market sources, Dunhill Kretek has already been in the market for more than a week.

In short, kretek differs from normal cigarettes (whites) due to its presence of clove oil that is known to have curative properties.

Despite having 60-70% tobacco and 30-40% clove oil in kreteks, there is still no conclusion of whether kreteks are better/ healthier than whites.

The new line came as a surprise as we did not expect the legal tobacco player would manufacture kreteks, and BAT is the first in the industry to do so.

We are neutral on this as we view the product’s contribution to the group as marginal as majority of the legal cigarette smokers smoke whites. We also opined that the impact towards reducing illicit kretek would be insignificant either.

Illicits are still the major concern despite the declines in 2011 and 2012. The decline was largely due to the drop in illicit kreteks, offsetting the increase in illicit whites. Risks

(1) Exceptionally higher excise duty hike; (2) Increase in illicit trade volume; (3) Weaker-than-expected TIV; and (4) Regulation tightening.

Forecasts

Unchanged.

Rating

HOLD

Positives – (1) High dividend yield stocks; (2) Countercyclical share price pattern; (3) Oligopoly industry; and (4) Resilient earnings and low capex requirements.

Negatives – (1) Highly regulated industry; (2) Potential excise duty hike; (3) High level of illicit cigarettes in the market; and (4) Prices already reflect fundamentals

Valuation

Maintain HOLD with unchanged TP of RM59.86 based on DCF valuations.

Source: Hong Leong Investment Bank Research - 9 Sep 2013