The Star reported over the weekend that smoking will soon be banned at all eateries nationwide, even at open-air premises and those without air-conditioning. Maintain NEUTRAL and MYR62.50 TP (6% downside). We view the news as a negative development for the tobacco players as cigarette sales volume is likely to decline further if the smoke-free legislation at eateries is implemented.

• Smoking ban to be extended. The Star reported on 9 May that smoking will soon be banned at all eateries nationwide, even at open-air premises and those without air-conditioning. This includes mamak stalls, kopitiams and food courts. The Health Ministry (MOH) will also be gazetting all public and national parks, including theme parks, as nonsmoking zones. According to the report, MOH said the ban was in line with provisions set under the World Health Organisation’s Framework Convention for Tobacco Control, to which Malaysia is a signatory. However, it still wants public feedback on the implementation of the ban. The public has until 18 May to give its views via the MOH website.
• Impact on tobacco players. We view the latest smoking ban as a negative development for tobacco players like British American Tobacco (BAT). We believe, if implemented, cigarette smoking prevalence in Malaysian adults may potentially decline, but at a gradual pace. However, the smoking ban will have a more profound impact on cigarette sales volume, as the smoking ban at eateries will likely encourage smokers to cut back on cigarettes smoked, as Malaysia has a very high frequency of people eating out. This is according to Professor Dr JeanPierre Poulain, Head of the Chair of Food Studies: Food, Cultures & Health, Taylor’s Toulouse University Centre in The Star (3 Aug 2014).
• Forecasts and risks. As the smoking ban is still at the discussion stage, we make no changes to our earnings forecasts. Key risks to our forecasts include: i) lower sales volume, ii) higher-than-expected material costs, and iii) higher-than-anticipated excise duty hikes.
• Maintain NEUTRAL and TP of MYR62.50. We remain NEUTRAL on BAT, with our unchanged DCF-based MYR62.50 TP (WACC: 6.8%, TG: 1.5%). Although yields remain decent at ~5% for FY15F-17F, valuations are not sufficiently compelling to warrant a more positive opinion, as the stock already trades at 20x FY15F P/E (its historical 5-year mean) relative to its modest earnings growth prospects and the mature industry.