BAT  announced  that  prices  of  all  its  cigarette  brands  be  raised  by MYR1.50 per pack effective yeserday, citing the increase of 3 sen per stick  in  excise  duty  as  the  reason. Maintain  SELL  with  a  higher  DCFbased  TP  of  MYR59.60  (from  MYR57.80),  suggesting  a  downside  of 12.2%. We expect a significant drop in sales volume following the price hike, but we believe the higher ASP will more than offset the decline. 

An  excise  duty-led  price  hike.  British  American  Tobacco  (BAT)  has announced that prices of all its cigarette brands be raised  by  MYR1.50 per pack effective today, citing  the increase of 3 sen per stick  in excise duty, amounting to 28 sen per stick  from 1 Nov 2014  as the  reason for the  hike.  We  note  that  the  quantum  of  the  pri ce  hike  following  an increase of 3 sen per stick in excise duty is similar to Sep 2013. 

Outlook.  We  believe  BAT’s  competitors,  Philip  Morris  and  Japan Tobacco  International  (JTI)  will  raise  their  prices  as  well  following  the hike in excise  duty. However,  the quantum of the hike may  not be the same as BAT,  as Philip Morris did not follow suit during the price hike  in 8 Sep 2014.  Given the continued decline in legal sales over the years, the price hike will  accelerate the  decline in the sales volume. Although contraband  cigarettes’  market  share  dropped  3.1ppt  in  the  Mar-May 2014  period  vs  the  Oct-Dec 2013  period,  we note that the illicit  market share is still high at  35.8%. We expect a rise in the contraband  cigarette trade following the latest price hike. 

Forecasts  and  risks.  We  lift  our  earnings  estimates  by 2.4%/10.7%/2.9%  for  FY14/15/16  respectively  after  updating  our  ASP, cost  and  volume  assumptions.  Key  risks  to  our  forecasts  include stronger sales volume and lower-than-expected raw material costs. 

Maintain  SELL  with  TP  of MYR59.60.  We  nudge  our  DCF-based  TP higher  to  MYR59.60  (from  MYR57.80)  (WACC:  7.2%,  TG:  1.5%) following  the  revision  to  our  earnings  forecasts.  With  unattractive valuations relative to its earnings growth as well as unappealing dividend yield, we reiterate our SELL recommendation  on the stock. The stock is currently trading at 20x FY15 P/E (+1 STD of its historical 5-year mean). 

Source: RHB