We  are  downgrading  ROTH  to  SELL  with  a  lower  MYR54.60  FV  (from MYR61.07)  given:  i)  its  rich  valuations,  ii)  slowing  industry  volume growth,  and iii) a  possible  tobacco excise duty   hike.  Given  rising bond yields,  we believe  that  companies  that  dish out high dividends  despite limited growth opportunities  do not deserve  such  high P/E  valuations. The stock is now trading at +1SD above its five-year historical mean.

- Flamed out.  We expect industry cigarette sales volume to come under renewed  pressure  with  the  Government  potentially  raising  the  excise duty on tobacco  products  in  the upcoming Budget.  This may be further aggravated by the ramp-up of subsidy rationalisation efforts, as well as the possible implementation of the goods and services tax (GST).

- More resilient.  We think ROTH will be  better equipped  to weather  the challenges, due to its stronger foothold in the premium cigarette segment –  making up  >70% of the company’s cigarette sales  –  where  smokers tend  to  be  less  price-sensitive.  Furthermore,  it  has  a  contract manufacturing  business  which  contributes  around  10%  of  its  total revenue and is unaffected by domestic cigarette demand.

- Forecasts and risks.  We make no changes to our estimates.  Key risks to  our  forecasts  include:  i)  a  lower-than-expected  excise  duty  hike,  ii) stronger sales volume, and iii) lower-than-expected raw materials costs.

- Investment case.  We are  raising  ROTH’s WACC  assumption  to  6.0% from 5.5% after increasing our beta assumption to 1.0 from 0.79. This is to better reflect  its recent price performance and  a higher systematic risk moving forward. We  cut our  FV to  MYR54.60 (WACC: 6.0%, TG: 1.0%) from MYR61.07, based on FCFF valuation.  Given  rising bond  yields,  we think that  companies  that  dish out high dividends  despite  limited growth opportunities  do  not deserve  such  high  P/E  valuations.  Hence,  we  are downgrading the stock to SELL from Neutral.

Source: RHB