News  British American Tobacco (BAT) has announced that the prices of all its cigarette brands will be revised back to their previous pricing before 8 September 2014.

 Prices of Dunhill, Kent, Benson & Hedges will be revised back to RM12 per pack (from RM13), while Peter Stuyvesant and Pall Mall brands will carry selling prices of RM10.50 per pack (from RM11.50). Meanwhile, premium brands including Lucky Strike and Rothmans will be retailing at RM12.50 per pack (from RM13.50).

 The revised cigarette prices will be effective from 22 September 2014.

Comments  BAT stated that the last price increase was to account for the inflationary cost pressure but it decided to reverse its earlier decision as the Group aims to stay competitive in the market.

 To recap, the Group increased the prices of its cigarettes by 8%-9.5% across board a fortnight ago on 8 September 2014, which we had perceived as negative to the tobacco industry flooded by illicit cigarettes which commanded significant market share of 38.9% during the Oct-Dec 2013 period.

 We are taken by surprise with this announcement as it has only been two weeks since the Group announced the previous price increase. However, we deem the development positive in sustaining the industry growth as the higher selling price would have the effect of inducing further brand substitution or down trading to the illicit cigarettes.

Outlook  We reiterate our negative view on the outlook of the company as well as the whole tobacco industry itself. Industry volume has been on a declining trend as high selling price on the back of high excise duty has fuelled the illicit trade.

 Nonetheless, the illicit trades are expected to be toned down following the efforts of the Royal Malaysia Customs through its “Ops Outlets” operations from March 14 till present. However, we reckon that stronger and continuous efforts are required to safeguard the health of the industry.

Forecast  As we have yet to impute the financial impact of the previous price increase into our forecast we will leave our earnings forecasts unchanged following the status quo in cigarette prices.

Rating Maintain UNDERPERFORM

Valuation  Maintain our TP of RM64.50 based on 20x 2015F EPS of 322.9 sen which implies a +0.5 SD over a 5-year mean.

Risks to Our Call Better-than-expected outcome of RMC’s “Ops Outlets” operations.

Source: Kenanga