News  Over the weekend, BAT announced price hikes for all its cigarette brands effective today (30 Sept).

 The selling price will be raised by RM1.50 for both the premiums (Dunhill and Kent) and aspirational premium (Peter Stuyvesant and Pall Mall) brands to RM12.00 and RM10.50 respectively.

 We understand that the price increase came in response to a 14% excise duty hike, which brings the total excise duty per box of 20 sticks to RM5.00.

Comments  While we had anticipated a hike in excise duty given the 2-year hiatus, we are, nevertheless, surprised by the quantum of the excise tax increase, and further still by BAT's decision to raise prices by a staggering RM1.50 per box.

 Furthermore, this comes against the backdrop of the 30.0 sen price increase per box as recent as 4 months back (3rd June 2013), in addition to the 20.0 sen increase just under a year ago (22nd Oct 2012).

 As a result, the total industry volumes for the legal market may suffer.

 However, we believe that the price increase would be more than sufficient to counteract the loss of volume; the net impact being slightly positive for BAT's earnings.

Outlook  That being said, the higher cigarette prices would fuel further risk in the already higher levels of illicit cigarette consumption in Malaysia, where illegal cigarette brands are being sold for as little as RM3.50.

 Although BAT had been making good progress in strengthening its market leadership over the years, the overall legal market consumption has been declining due to increasing competition from illicit white cigarettes.

 Should this trend continue, BAT's domestic volumes could be affected further despite ongoing efforts to diversify the group's exposure in the fast-growing contract manufacturing segment.

Forecast  We increase our FY13E-FY14E NP slightly to RM836.9mRM899.9m, respectively, which assumes a higher net margin of 18.9%-19.8% (+0.7ppt to +1.3ppt), respectively.

Rating   We are maintaining our MARKET PERFORM rating given limited upside to our TP.

Valuation  We increase our TP slightly to RM63.00 from RM61.36 earlier, which is based on an unchanged targeted PER of 20x on the FY14 EPS of 315.2 sen.

Risks to Our Call A higher-than-expected increase in illicit trade, which would accelerate the shrinkage of the legal market TIV.

Source: Kenanga