British American Tobacco; Hold; RM62.50
Price Target: RM60.00; ROTH MK

According to local media today, excise duty for tobacco will be increased by 14% effective today. Consequently, BAT will also raise prices across all its products by about 14-17%. This brings the prices of a 20-stick pack to RM12.00 (from RM10.50) for Dunhill, Kent and Benson & Hedges, RM10.50 (from RM9.00) for Peter Stuyvesant and Pall Mall, and RM12.50 (from RM10.90) for Pall Mall plain, Lucky Strike and Rothmans International.

The sharp increase in excise duty was unexpected. Assuming a 1% drop in domestic volume, we estimate FY14 earnings would drop by 5%. Apart from the downside to earnings, valuations are expensive at 21x FY14 EPS (>+2 SD). However, downside could be limited by net dividend yields of 4.7%. We maintain a HOLD recommendation with a DDM-based RM60.00 TP.

Source: HwangDBS Research - 30 Sep 2013