Analysts see BAT earnings weighed down by costlier cigarettes


  • Taxation
  • Thursday, 18 Oct 2018

BAT said it remained concerned with legal volumes continuing to be impacted by the current high incidence of illegal cigarette trade. The outlook for the second half of 2018, BAT said, would be very much dependant on the recovery of the legal market.

PETALING JAYA: British American Tobacco (M) Bhd (BAT) could see its earnings weighed down by higher cigarette prices if the quantum of increase results in consumers switching to cheaper alternatives, say analysts.

TA Research, for one, noted the risk of a decline in legal market share for cigarettes in the event of price hike.

“According to our sensitivity analysis, every 5% increase in cigarette price is expected to increase BAT’s earnings estimates by 1.2% ceteris paribus. However, considering the impact of consumers switching to cheaper alternatives, cigarette price increase will ultimately hurt BAT’s earnings,” the brokerage said in its report yesterday.

TA Research projected the legal market share for cigarettes to reduce by 3% year-on-year (yoy) to 20.5 billion sticks in 2019 from the estimated 21.1 billion sticks in 2018.

“In the case of BAT, we maintain our earnings forecast for its financial year (FY) ending Dec 31, 2018, but reduce our earnings forecasts by 6.6% for FY19 and FY20, considering higher cigarette prices would cause consumers switch to cheaper brands or even contraband options,” the brokerage said.

TA Research lowered its target price for BAT to RM27.39 from RM28.29 previously. It maintained its “sell” call on the counter.

The Health Ministry on Monday announced that cigarette prices in Malaysia would be raised in the next three weeks to account for the 10% sales and services tax (SST) that was implemented on Sept 1. The Health Ministry was still in the stage of finalising the price hike for cigarettes.

CIMB Research said it was neutral on the news, given that BAT should eventually hike its cigarette prices after the SST kicks in.

However, the brokerage reckoned that if BAT raised its cigarette prices by more than 50 sen per pack, there could be risk to the group’s earnings.

“We had previously assumed an increase of 50 sen per pack in our earnings estimates. Hence, there is downside risk to our earnings in the event that the quantum of price increase breaches 50 sen per pack,” CIMB Research said in its report.

“Conversely, there is an upside risk if the price hike is less than 50 sen per pack,” it noted.

CIMB Research maintained its “hold” call and target price of RM32.22 for BAT, pending the finalisation of the quantum of the price increase.

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