BAT downgraded to Hold, higher selling price to impact sales

KUALA LUMPUR: CGS-CIMB is negative on British American Tobacco Bhd’s (BAT) decision to raise its selling prices by 50 sen per pack post SST, as it expects a negative impact on sales volume.

“We are negative on the retail price increase, given the historical drop in BAT’s sales volume after previous rounds of retail price hikes. 

“We think BAT’s efforts to improve sales volume may slow down, even when the new government ramps up activities to tackle illicit trade, which BAT estimates commanded market share of 63% at end-Jun 2018,” it said on Wednesday.

It added that fellow Big Three tobacco producer, JT International Bhd also raised its cigarette prices by 50 sen per pack, but the price hike by Philip Morris (Malaysia) Sdn Bhd was by a lower quantum of 20 sen per pack. 

This breaks away from the trend of the three players having similar prices for all of their products in each pricing category. 

“Thus, we think competition may heat up in the legal tobacco market, with Philip Morris having the price advantage,” it said.  

The research house cut its FY18-20F earnings per share by 12.4-20.5% to account for the likely drop in sales volumes and higher advertising and promotion (A&P) expenses. 

“Our previous EPS growth projections assumed BAT’s selling prices would be maintained, and sales volumes recover on the back of government enforcement against illicit goods. 

“With the price increase, we believe the earnings recovery angle becomes a long-term play,” it said in a note.

It downgraded the stock to Hold with a lower target price of RM32.22. 

“In our view, BAT’s CY19 dividend yield of 4.6% should provide some consolation to investors,” it said.