British American Tobacco - Raising selling prices again! (REDUCE -Maintained)
Target RM62.00 (Stock Rating: REDUCE)
Effective today, BAT has increased its cigarette selling prices by RM1.50/pack, to RM13.50/pack for premium cigarettes and RM12/pack for VFM sticks, due to the increase of 3 sen per stick in excise duty. While sales volume will most likely drop substantially in the immediate term, we believe that it will have a net positive impact on BAT’s FY15 earnings as long as the sales volume does not fall more than 16-17% which we think is unlikely. We cut our FY14-16 sales volume assumption by 2-4% pts factoring the potential fall in sales volume due to the higher selling prices. Our FY14-16 net profit was however raised by 1-10% as the higher selling price is more than sufficient to offset the decline in the potential drop in sales volume. We maintain Reduce on BAT with a higher DDM-based target price. We prefer Gudang Garam.
What Happened
BAT’s cigarette selling prices have been increased by RM1.50/pack, effective today. This means that premium cigarettes are now priced at RM13.50 versus RM12/pack before the hike, while VFM cigarettes are priced at RM12/pack versus RM10.50 per pack previously. According to the media, the hike is in response to the 3 sen per stick excise duty increase announced by the government on 1 Nov. Other tobacco players have yet to raise prices.
What We Think
The excise duty hike came as a surprise to us as we did not expect the government to raise excise duty after the budget. In the last round of 2 sen per stick excise duty hike in end of September 2013, BAT raised prices by RM1.50/pack. Despite the higher excise duty hike this time round, BAT still raised prices by the same amount at RM1.50/pack, indicating that the company may be concerned of the declining legal sales volume. While we believe the price increase will cause another plunge in industry volumes in the immediate term, it will have a net positive impact on BAT’s FY15 earnings as long as the sales volume does not fall more than 16-17% which we think is unlikely. Although PMI did not follow suit when BAT raised its prices in early of September, we believe that its competitors will increase prices this time as the excise duty has been raised.
What You Should Do
Industry volume is 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.
Source: CIMB Daybreak - 05 November 2014,
Effective today, BAT has increased its cigarette selling prices by RM1.50/pack, to RM13.50/pack for premium cigarettes and RM12/pack for VFM sticks, due to the increase of 3 sen per stick in excise duty. While sales volume will most likely drop substantially in the immediate term, we believe that it will have a net positive impact on BAT’s FY15 earnings as long as the sales volume does not fall more than 16-17% which we think is unlikely. We cut our FY14-16 sales volume assumption by 2-4% pts factoring the potential fall in sales volume due to the higher selling prices. Our FY14-16 net profit was however raised by 1-10% as the higher selling price is more than sufficient to offset the decline in the potential drop in sales volume. We maintain Reduce on BAT with a higher DDM-based target price. We prefer Gudang Garam.
What Happened
BAT’s cigarette selling prices have been increased by RM1.50/pack, effective today. This means that premium cigarettes are now priced at RM13.50 versus RM12/pack before the hike, while VFM cigarettes are priced at RM12/pack versus RM10.50 per pack previously. According to the media, the hike is in response to the 3 sen per stick excise duty increase announced by the government on 1 Nov. Other tobacco players have yet to raise prices.
What We Think
The excise duty hike came as a surprise to us as we did not expect the government to raise excise duty after the budget. In the last round of 2 sen per stick excise duty hike in end of September 2013, BAT raised prices by RM1.50/pack. Despite the higher excise duty hike this time round, BAT still raised prices by the same amount at RM1.50/pack, indicating that the company may be concerned of the declining legal sales volume. While we believe the price increase will cause another plunge in industry volumes in the immediate term, it will have a net positive impact on BAT’s FY15 earnings as long as the sales volume does not fall more than 16-17% which we think is unlikely. Although PMI did not follow suit when BAT raised its prices in early of September, we believe that its competitors will increase prices this time as the excise duty has been raised.
What You Should Do
Industry volume is 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.
Source: CIMB Daybreak - 05 November 2014,
