News  According to Rakyat Post, the price of a pack of cigarettes across all BAT brands will go up by RM1.50 effective by November 5.

 Dunhill, Benson & Hedges and Kent will be selling at RM13.50 (from RM12), Lucky Strike and Rothmans at RM14 (from RM12.5), Pall Mall and Peter Stuyvesant at RM12 (from RM10.5)

 Channel checks with several convenience stores confirm the price hike. The new prices represent increases of 12%-14.3%.

Comments  We were surprised by the latest development as this is the third price twist within just a time period of 2 months. To recap, BAT announced a price hike of 8%-9.5% in earlier September only to reverse the decision two weeks later, citing the loss of competitiveness as main reason.

 Pending further clarification from the management, we think that the clamping down of the illegal volume (from 38.9% to 35.8%, the latest reading) could be one of the considerations behind the price hike decision but whether or not the excise duty has been increased is unknown at this juncture.

 We are NEGATIVE on the latest price hike as we expect down trading or brand substitution to illicit cigarettes due to the higher prices. Meanwhile, the scenario of market share loss in the legal market could be repeated if its competitors choose not to follow suit (assuming there is no hike in excise duty).

Outlook  Decline in legal volume started to show after a series of successful Ops Outlet operations, but better efforts are required in order to tackle the illicit market with the price difference between the legal and illicit cigarettes now further widened after the latest price hike.

 The recovery in legal market and the consolidation of market share recently has slightly boosted the outlook of the company, but we reckon that a price hike at this juncture might exacerbate the volume decline going forward with brand substitution and down trading expected. Thus, we reiterate our negative stance on the company.

Forecast  We keep our earnings forecasts unchanged for now, pending further clarity on the price hike decision. We foresee minimal financial impact from the price hike as we expect the higher selling price to be offset by the resulting decline in demand.

Rating UNDER REVIEW

 We are putting our call and Target Price under review pending further information on the development. Our previous Call was UNDERPERFORM with TP of RM65.70.

Valuation  Our previous TP of RM65.70 was based on 20x 2015F EPS of 321.8 sen.

Risks to Our Call Better-than-expected efforts of the authorities in tackling the illicit cigarettes.

Source: Kenanga