Journey to Wealth
Tobacco - Pricier Smokes From BAT
THE BUZZ
Bernama and several publications reported that BAT announced a RM0.20 per pack price increase for all its cigarettes brands beginning 22 Oct. A visit to convenience stores showed that the price increase has indeed taken place. Dunhill will now sell for RM10.20 per pack, while BAT's Value-for-Money (VFM) brands like Pall Mall will retail for RM8.70 per pack. JTI's and PMI's cigarettes remain priced at the original RM10 for Premium brands and RM8.50 for VFM brands.
OUR TAKE
A surprise. The news articles provided little detail on whether the Government had chosen to raise tobacco excise duties off-budget by RM0.01 per stick to RM0.23 per stick. BAT's MD William Toh told the press that excise and sales tax payable had increased as a result of the Royal Malaysian Customs' mandated uplift in cigarette ex-factory pricing of between 26%-58%, which initially suggested that there has indeed been an excise hike. Convenience stores, however, continue to sell non-BAT brands at the original prices, an indication that the increase is a company-specific initiative.
A moderate hike. The RM0.20 per pack price increase is a moderate one, raising BAT's Premium and VFM cigarette prices by 2.0% and 2.4% respectively. As Premium cigarettes had previously already broken the RM10-per-pack psychological price barrier, we expect any volume reduction in BAT's Premium sales to be minor. Its VFM volumes should see a bigger plunge, given its target consumers' higher price sensitivity.
JTI and PMI matching BAT's prices? We don't expect much consumer migration toward illicit, duty-unpaid cigarettes if legal alternatives (like PMI's Marlboro and JTI's Mild Seven for the Premium segment and JTI's Winston for the VFM segment) remain priced at the original RM10 and RM8.50 per pack for the Premium and VFM segments respectively. A switch by less brand-loyal smokers towards other legal brands appears more likely. JTI and PMI has historically matched BAT's pricing, however, so we should see pricing differentials disappear in a few days and instead see some rise in illicit trade.
Fatter margins, thinner volumes. We will still need to check with BAT's management to better understand the rationale behind the price increase. Should there be no additional financial obligations towards the Government (ie. more tobacco-related taxes), the price increase may well be an overall positive for BAT. Over 84.7% of the company's sales volume is in the Premium segment, where consumers are less price-sensitive.
Maintain NEUTRAL. We maintain our forecasts and FV of BAT at RM56.92 (NEUTRAL) pending a chat with management. If there is an industry-wide price increase, industry volumes should contract again in FY13, with BAT's sales volumes expected to decline by 0.7% y-o-y. The moderate price increase may be a smart move for BAT if there are no additional financial obligations to the Government, in view of the company's less price-sensitive customer base.
Source: OSK
Bernama and several publications reported that BAT announced a RM0.20 per pack price increase for all its cigarettes brands beginning 22 Oct. A visit to convenience stores showed that the price increase has indeed taken place. Dunhill will now sell for RM10.20 per pack, while BAT's Value-for-Money (VFM) brands like Pall Mall will retail for RM8.70 per pack. JTI's and PMI's cigarettes remain priced at the original RM10 for Premium brands and RM8.50 for VFM brands.
OUR TAKE
A surprise. The news articles provided little detail on whether the Government had chosen to raise tobacco excise duties off-budget by RM0.01 per stick to RM0.23 per stick. BAT's MD William Toh told the press that excise and sales tax payable had increased as a result of the Royal Malaysian Customs' mandated uplift in cigarette ex-factory pricing of between 26%-58%, which initially suggested that there has indeed been an excise hike. Convenience stores, however, continue to sell non-BAT brands at the original prices, an indication that the increase is a company-specific initiative.
A moderate hike. The RM0.20 per pack price increase is a moderate one, raising BAT's Premium and VFM cigarette prices by 2.0% and 2.4% respectively. As Premium cigarettes had previously already broken the RM10-per-pack psychological price barrier, we expect any volume reduction in BAT's Premium sales to be minor. Its VFM volumes should see a bigger plunge, given its target consumers' higher price sensitivity.
JTI and PMI matching BAT's prices? We don't expect much consumer migration toward illicit, duty-unpaid cigarettes if legal alternatives (like PMI's Marlboro and JTI's Mild Seven for the Premium segment and JTI's Winston for the VFM segment) remain priced at the original RM10 and RM8.50 per pack for the Premium and VFM segments respectively. A switch by less brand-loyal smokers towards other legal brands appears more likely. JTI and PMI has historically matched BAT's pricing, however, so we should see pricing differentials disappear in a few days and instead see some rise in illicit trade.
Fatter margins, thinner volumes. We will still need to check with BAT's management to better understand the rationale behind the price increase. Should there be no additional financial obligations towards the Government (ie. more tobacco-related taxes), the price increase may well be an overall positive for BAT. Over 84.7% of the company's sales volume is in the Premium segment, where consumers are less price-sensitive.
Maintain NEUTRAL. We maintain our forecasts and FV of BAT at RM56.92 (NEUTRAL) pending a chat with management. If there is an industry-wide price increase, industry volumes should contract again in FY13, with BAT's sales volumes expected to decline by 0.7% y-o-y. The moderate price increase may be a smart move for BAT if there are no additional financial obligations to the Government, in view of the company's less price-sensitive customer base.
Source: OSK
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