News

BAT through its subsidiary, Commercial Marketers and Distributors Sdn Bhd has announced that the prices of the cigarettes under its brands have been increased by 30 sen, effective 29 June 2015.

The new prices of Dunhill, Benson & Hedges, and Kent will be raised to RM13.80 (from RM13.50) while Peter Stuyvesant and Pall Mall prices will be increased to RM12.30 from RM12.00.

The new prices indicate increases of 2.2%-2.5%.

Comments

We were surprised by the latest development as the Group had previously raised the prices of its cigarettes by 50 sen back on 1st of April 2015, to take the GST into account, only to reverse the price adjustment on 17th April 2015, citing the rationale of maintaining competitiveness.

The price increase was mainly to pass through the extra costs arising from GST. However, we are neutral-to-negative on the minor price increase as BAT might lose its competitive edge in the challenging local tobacco industry which is dogged by illicit trades with a market share of >30% and also the persistently weak consumer sentiment.

While price increases can translate into additional profit to the Group, we expect the impact to be partially offset by volume decline. Consumers might switch to competitors that opt to maintain their prices to be competitive or even downtrade to illicit cigarettes if competitors follow suit in the price increases.

Outlook

Industry volume should normalize in 2Q15 following the GST front-loading that boosted the volume in 1Q15, with overall industry volume decline of 0.9% lower than the 3.5% we are expecting. However, with illicit market share showing signs of recovery, we do not think that the mild decline in industry volume can be sustained.

We maintain our neutral stance as the company has continued to deliver earnings growth on the back of declining volume as well as persistently weak local consumer sentiment. On the flip side, with regards to the Anti- Profiteering Act, we do not expect to see another round of price increase (which is the attractive selling point of BAT) until 3Q16. Thus, net profit growth in FY16 is forecasted to be flattish at 1.7%.

Forecast

We factor in the new prices but lower our market share assumption for BAT to factor in the negative impact from the price increase to the sales volume (down by 1.4%-4.0%). As a result, FY15E and FY16E net profits were revised higher by 0.5% and 1.7%, respectively.

Rating

Maintain MARKET PERFORM

Valuation

We downgraded our Target Price to RM65.75 (from RM67.40). We peg our TP at lower 18.6x (from 19.4x) PER FY16E, which implied -0.5 SD over the 5-year mean as compared to 5-year mean previously. The more conservative valuation is to reflect our concerns on the potential lower sales volume regardless whether competitors follow suit in increasing prices.

Risks to Our Call

Lower-than-expected market share.

Excise duty hike.

Source: Kenanga Research - 29 Jun 2015