British  American  Tobacco  (BAT)  has  revised  the  prices  of  all  its cigarette brands back to  their  pre-8 Sept  levels  effective  from  22 Sept. Management said the price revision is necessary to remain competitive. As  we  trim  our  earnings  forecasts  by  1.7%/7.5%  for  FY14/15 respectively,  we also lower  our DCF-based TP  accordingly to MYR56.00(from MYR56.40), representing a downside of 20.7%.  Maintain SELL.

Selling  price  revision  a  major  surprise.  On  8  Sept,  BAT  raised  its cigarette  prices  by  MYR1  per  pack, citing:  i)  mounting inflationary  cost pressure  amplified  by  progressive  loss  of  legal  domestic  volumes  over the years to illegal trade,  ii)  a decline in  contract manufacturing volume, and iii) competitive trade and distribution channels. As such, the move to reverse  the  price  increases  took  us  by  surprise  as  we  understand that BAT has never turned back after a price hike in the past decade. 

Maintaining  competitiveness  the  key  to  price  hike  reversal. Management  said  it  was  necessary  to  return  to  the  previous  prices  in order to remain competitive. As the local tobacco industry is oligopolistic by  nature, we believe  that  Philip Morris’ decision to keep  the  prices of its cigarette  brands  unchanged prompted  the  back-pedaling.  We note that Japan Tobacco International (JTI) also followed suit by reversing its price hike, effective from the same day. 

Cutting our earnings forecasts.  We tweak our ASP as well as volume assumption  in  view  of  the  change  in  ASP.  We  also  trim  our  earnings forecasts for FY14/15  accordingly by  1.7%/7.5%. We still hold the view that there will  likely  be a decline in  volume for FY14 and  FY15, although this could be less significant after the previous prices are restored. 

Maintain  Sell with  a  TP of MYR56.00.  We trim our DCF-based TP  to MYR56.00  (from  MYR56.40)  after  the  revision  in  earnings  forecasts. With its unattractive valuations relative to its earnings growth as well as unappealing  dividend  yield,  we  remain  bearish  on  the  stock.  Maintain SELL.

Source: RHB