We  downgrade  the  brewery  and  tobacco  sector  to  UNDERWEIGHT  as industry volume may pull back on a potential excise duty hike in Budget 2014.  Sector  valuations  are  demanding  while  rising  bond  yields  are taking the sheen off  sin stocks.  We downgrade  the stocks we cover  to SELL on cutting their FVs following selective earnings revisions.

Brewery
- Less froth. We believe the malt liquor market (MLM) may see a sharper slowdown in volume growth with the Government potentially raising  beer excise  duty  at  the  upcoming  Budget.  A  duty  hike  will  have  a  greater negative impact on  Carlsberg  Brewery Malaysia  (CAB)  given  Guinness Anchor (GUIN)’s  entrenched  foothold in the off-trade  and traditional ontrade  channels,  which  comprises  habitual  drinkers  who  are  less  pricesensitive.

- Sector downgrade.  We downgrade  both GUIN and CAB  to SELL from Neutral due to  their:  i) rich valuations, ii) slowing MLM  vo lume growth, and  iii) a  potential  hike in beer excise duty. We  lower our FVs on  GUIN and CAB to  MYR15.19  and  MYR11.31 from MYR20.46 and MYR13.32 respectively,  based  on  FCFF  valuation.  In  a  rising  bond  yield environment, we believe companies that offer high dividends  but which have limited growth opportunities  do not deserve to  trade at  such  high P/Es.  Following  the  stock  downgrades,  our  sector  call  is  now UNDERWEIGHT (from Neutral).

Tobacco
- Flame  starts  to  flicker.  We  expect  industry  cigarette  sales  volume  to come under renewed pressure in view of the potential of excise duties on tobacco products being raised at the upcoming Budget. That said, British American  Tobacco  (ROTH)  is  better  positioned  than  JT  International (RJR)  in  fending  off  a  duty  hike  given  its  stranglehold  in  the  premium segment where demand is more inelastic.

- Sector  downgrade.  We  downgrade  ROTH  and  RJR  to  SELL  from Neutral due to their: i) rich valuations, ii) slowing  industry  volume, and iii) a  potential  hike  in  tobacco  excise  duty.  Our  FV  for  ROTH  has  been lowered  to  MYR54.60  from  MYR61.07  while  that  for  RJR  is  cut  to MYR5.72  from  MYR6.93  respectively,  based  on  FCFF  valuation.  Amid rising bond yields, the yield appeal of tobacco stocks is fading as there is now  weaker  justification  for  their  already  demanding  valuations.  The 
sector is downgraded to UNDERWEIGHT from Neutral. 

Source: RHB