PETALING JAYA: The increase in the prices of British American Tobacco (M) Bhd’s (BAT) cigarettes is expected to affect its sales volume, but analysts believe it will have a net positive impact on the tobacco company.
“While the sales volume will most likely drop substantially in the immediate term, we believe that it will have a net positive impact on BAT’s financial year ending Dec 31, 2015 (FY15) earnings as long as the sales volume does not fall more than 16%-17%, which we think is unlikely,” CIMB Research said.
Yesterday, BAT announced that it had increased its cigarette selling prices by RM1.50 per pack to RM13.50 a pack for premium cigarettes and RM12 for a pack of value-for-money (VFM) sticks, due to the increase of three sen per stick in excise duty. Other cigarette manufacturers, JT International Bhd and Philip Morris (Malaysia) Sdn Bhd (PMI), have yet to raise prices.
Hong Leong Investment Bank Research (HLIB) agreed that it would not be surprised if total industry volume (TIV) continued to be impacted by the following price hike.
“Recall that BAT’s volume fell by 7% in September alone when it announced an RM1 per pack price hike, which lasted only for two weeks. Hence, TIV could potentially decline at a larger quantum.
“Apart from the impact on volume, we believe the market share of illicit cigarettes will be back on the rising trend after it declined by 3.1 percentage points in Wave 1 to 35.8%,” it said.
HLIB has maintained a “hold” call on BAT and tweaked its volume forecast lower, expecting a double-digit decline in FY15 and a slight recovery in FY16. As such, it expects BAT’s FY15-FY16 earnings per share to be reduced by 8%-16%.
CIMB said the excise duty hike came as a surprise, as it did not expect the Government to raise the excise duty after the budget.
It added that in the last round of the two-sen-per-stick excise duty hike at end-September 2013, BAT had raised prices by RM1.50 per pack.
“Despite the higher excise duty hike this time around, BAT still raised prices by the same amount at RM1.50 per pack, indicating that the company may be concerned of the declining legal sales volume,” it said, adding that it believes that its competitors will increase prices this time as the excise duty has been raised.
CIMB said industry volume was expected to be weak in view of the higher selling prices and weaker consumer spending.
“BAT will be consistently affected by regulatory risks and its lost leadership position in pricing. Investors should reduce their exposure to the stock. Dividend yield is too low for the potential risk,” it added.
Meanwhile, AmResearch said in view of the negative correlation between legal TIV and retail selling price, it now forecast legitimate TIV to contract by 9% for FY14 forecast and 10% for FY15 forecast.
It noted that the excise hike in third-quarter 2013 had caused volumes to collapse by about 20% in the following quarter.
“That said, we believe that BAT’s margins would remain intact, as we believe the price increase is more than sufficient to absorb the impact of the duty hike.
“As it is, the group had recorded a 1.6 percentage point expansion in its earnings before interest and tax margin for nine months FY14 to lift its cumulative earnings by 12%,” AmResearch said.
The research house said despite BAT’s muted earnings growth and the lack of positive catalysts for the industry, it did not expect BAT’s share price to decline much, as it was generally held for its defensive attributes.
It added that BAT’s yields were decent, at about 4.7%.