Highlights

• BAT has announced that it will be revising the prices of all its cigarette brands to thei r last selling price on 1st April 2015 effective the 17th April 2015. After cutting its selling prices by RM0.20/20-stick pack last week, the group initiated further reduction in prices by another RM0.30/20-stick pack last Friday.

• Post-price revision, cigarette prices would be RM13.50 & RM12.00 for premium and VFM segment; back to their pre- GST price hike levels.

Comment

• This price reduction comes as a shock as BAT had only recently reduced prices by RM0.20/20-stick pack effective the 10th of April to RM12.30-RM13.80. Officially, Managing Director Stefano Clini cites that the price revision was due to competitive pressures.

• The total decrease was -3.57% for premiums and -4.16% for VFM brands since its GST inspired price hike.

• We opine that the double pricing revision is a strong indication that BAT is defending its market share that it has lost in the period of the price differential among tobacco players between 1st April and 17th April. We also believe that the total reversal of pricing is to maintain its competitiveness in the market. Recall that a similar situation transpired in September 2014 whereby BAT increased prices by RM1.00 (but its competitor did not follow suit), resulting in a signi ficant decline in market share. Two weeks later, BAT reversed its pricing decision, which is believed to be due to loss in market share.

• It would appear that the players in the tobacco industry are competing on prices in the face of dampened consumer confidence. Recall that JTI did not increase the price of its premium brand (i.e. Mevius – RM13.50) whilst PMI increased their prices by a lesser quantum (i.e. Marlboro – RM13.90) in conjunction with the implementation of the GST.

• To note, we had al ready 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 as well as reduced consumer confidence.

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

• 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 - 20 Apr 2015