Highlights

• BAT has reduced its cigarette prices by RM0.20/20-stick pack for its premium and value-for-money (VFM) brands effective 10 April 2015.

• Post-price hike, new cigarette prices would be RM13.80 & RM12.30 for premium and VFM segments respectively.

Comment

• We were taken by surprise knowing that BAT have reduced the selling prices of its cigarettes across the board by RM0.20/20-stick pack.

• Taking this into account, the effective price hike post -GST implementation was 2.2% and 2.5% for BA T’s premium and VFM segment, respectively. The percentage increases have reduced much lesser in comparison to the 6% rate under GST.

• Although there was no official statement released by BAT on the reduction of prices as well as the reason behind the move, we believe this could due to price competitiveness among industry players. However, our channel checks showed that some retailers have adjusted their selling prices downwards by RM0.20/pack while some have not.

• We also view the price reduction as a move for BAT to stay as market leader by shielding its market share in the industry. The hike of RM0.50/pack on 1 April 2015 may have impacted the group’s volume despite the hike was less than 6%.

• Furthermore against its competitors, we gather that PMI increases its selling prices at a smaller quantum vs. BAT (i.e: Malboro priced at RM13.90) while JTI continue to sell at pre- GST prices for its premium brands (i.e: Mevius at RM13.50). For JTI’s VFM-brands, it raised prices slightly by RM0.30/pack (i.e: Pall Mall at RM12.30).

• Recall that we had already imputed a double digit decline in volume for FY15 to account for the signi ficant hike of RM1.50/20- stick pack in Nov 2014 and GST implementation.

Risks

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

Forecasts

• Although BAT may have to partially absorb the increase in costs, which would result in some margin compression, we are keeping our forecasts unchanged for now pending further clarifications from management. Furthermore, BAT could move towards more extensive cost-savings mode in order to offset the increase in costs.

Rating

HOLD

• Posi tives – (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

Target price remains unchanged at RM63.20 based on DCF valuations. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 13 Apr 2015