BAT reduced prices of all its cigarette brands by MYR0.20 per pack effective 10 Apr. Maintain NEUTRAL with a revised MYR63.10 TP (from MYR63.40, 9% downside). We believe the price reduction was performed to maintain its competitiveness in the market against its competitors in the fairly matured tobacco industry. We trim our FY15F-17F earnings by 1-1.3%.

A MYR0.20 price reduction. British American Tobacco Malaysia (BAT) reduced prices of all its cigarette brands by MYR0.20 per pack effective 10 Apr to MYR12.30-13.80 (from MYR12.50-14). We believe the reduction was done to maintain its competitiveness, given thatcompetitor Phillip Morris M SB (Phillip Morris) hiked its cigarette prices by a lesser quantum of MYR0.30-0.40 per pack on 1 Apr 2015. Meanwhile, Japan Tobacco International (JTI) maintain their prices. By comparison, BAT had hiked prices by MYR0.50 per pack upon the implementation of the goods and services tax (GST).

Outlook. We believe BAT has lost some market share during the perioddue to the price differential, which reflects the fairly mature local tobacco industry. We reiterate our view that legal sales volume will continue its decline following thelast price hike of MYR1.50 per pack in Nov 2014. Although contraband cigarettes’ market share has dropped for two consecutive quarters, we note that – according to Nielsen data – itstill enjoys approximately one-third share of the total market.

Forecasts and risks. We believe the latest price reduction will dentBAT’s margins slightly. Hence, we trim our FY15F-17F earnings by 1-1.3%. Key risks to our forecasts include a: i) lower sales volume, ii) higher-than-expected material costs, and iii) higher-than-expected excise duty hike. We see downside risks to earnings amidst the industry’s challenging outlook, plagued by the high proportion of the market being supplied by contraband cigarettes and frequent excise duty hikes.

Maintain NEUTRAL with a revised TP of MYR63.10 (from MYR63.40). We maintain our NEUTRAL call with a revised MYR63.10 TP (WACC: 6.8%, TG: 1.5%). Although dividend yields remain decent at around 5% for FY15F-FY17F, valuations are not sufficiently compelling to warrant a more positive opinion, as the stock already trades at 20.4x FY15F P/E (its historical 5-year mean) relative to its modest earnings growthprospects and the mature industry.