BAT  has  revised  prices  of  all  its  cigarette  brands  back  to  pre-1  Apr levels  effective  17  Apr.  Maintain  NEUTRAL,  with  a  revised  TP  of MYR62.50 (from MYR63.10, 8% downside).  Management stated that the price  revision  is  for  BAT  to  remain  competitive,  given  the  market situation  today.  We  trim  our  FY15F-FY17F  earnings  forecasts  as  we believe the revision could dent its margins further.

• Prices back to pre-1 Apr levels.  British American Tobacco (BAT) has revised  prices  of  all  its  cigarette  packs  back  to  pre-1  Apr  levels  to MYR12-MYR13.50 from MYR12.30-MYR13.80 per pack, with effect from17  Apr.  Management  stated  that  the  further  price  revision  is  for  the company  to  remain  competitive,  given  the  market  situation  today.  Torecap, it  reduced prices of its cigarettes  by MYR0.20 per pack a week ago (see our 13 Apr 2015 report: BAT - A Cheaper Puff ).
• Further price revision necessary to maintain its market share. Legal sales volume has been on decline over the past five years, reflecting that earnings growth could come from either: i)  a hike in ASP that more than offsets the declining sales volume, or/and, ii) a gain in market share from competitors. We believe BAT’s decision to further revise its prices is due to some market share loss to Japan Tobacco International (JTI), given itsdecision  to  maintain  prices  post  the  implementation  of  the  goods  and services tax (GST). Moreover,  competitor,  Phillip Morris  (M)  SB (Phillip Morris) could follow suit and its prices may revert to pre-1 Apr levels too.
• Forecasts and risks. This further  price reduction may  dent its margins further  due to  absorption of costs arising from  the  GST. Hence, we  trim our  FY15F-17F  earnings  forecasts  by  1.4-1.5%.  Key  risks  to  our forecasts include: 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 fairly high levels of contraband cigarettes and frequent excise duty hikes.
• Maintain  NEUTRAL with a revised  TP of MYR62.50.   We maintain our NEUTRAL  recommendation,  with  a  revised  TP  of  MYR62.50  (from MYR63.10)  (WACC: 6.8%, TG: 1.5%).  Although dividend yields remain decent at ~5% for FY15-17F, valuations are not sufficiently compelling to warrant a more positive opinion,  as the stock  already  trades  at  a  20.4x FY15F  P/E  (its  historical  5-year  mean)  relative  to  its  modest  earnings growth prospects and the fairly mature industry.