Tobacco stocks outperformed the KLCI in 2011, helped by the first tax reprieve in 9 years in Budget 2012. Industry volumes could recover with a stable excise duty and selling price. However, this might not last forever as there remains the risk of a duty hike after the elections. We stay Neutral on the tobacco sector. While we like its defensive appeal and steady earnings, this is balanced by regulatory risk. Our top pick is BAT as it has higher exposure to the premium segment, which should be less prone to downtrading in a weak economic environment.

 

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