BAT (4162) - British American Tobacco - GST leads to price hike
Target RM59.30 (Stock Rating: REDUCE)
Effective today, BAT will increase its cigarette selling prices by RM0.50/pack to RM14/pack for premium cigarettes and RM12.50/pack for VFM sticks due to the implementation of GST. The price hike may cause a slight drop in sales volume given generally-weaker consumer spending. We cut our FY15-17 earnings forecasts by 1-3% as we trim our sales volume assumptions by 1-2%. We maintain Reduce on BAT, with a lower DDM-based target price. For exposure to the tobacco sector, we prefer Gudang Garam. For dividend yield plays, we recommend the brewers.
What Happened
BAT’s cigarette selling prices will increase by RM0.50/pack, effective today. This means that premium cigarettes are now priced at RM14/pack versus RM13.50 before the hike while VFM cigarettes are priced at RM12.50/pack versus RM12 previously. The hike is due to the implementation of GST, which comes into effect today.
What We Think
The increase in selling prices did not come as a surprise as price hikes were expected to accompany the implementation of GST, which will replace the sales tax of 5%. We expect the price hike to cause a slight decline in sales volume given the higher selling prices and general slowdown in consumer spending. Although we are projecting weaker sales volume, we do not expect volumes to experience a large decline as (i) smokers are psychologically ready for the price hike given the wide anticipation following the announcement of GST, and (ii) the price hike of RM0.50/pack is much lower than the increase of RM1.50/pack in Nov 2013, which caused a 18.4% drop in sales volume. Considering this and based on the historical trend, we trim our sales volume assumptions by 1-2%. We believe sales volume will be affected more by the general slowdown in consumer spending on the back of higher living expenses than it will be by the small price increase of RM0.50/pack. Channel checks at convenience stores this morning show that rivals JTI and PMI have not increased prices but they will probably do so soon.
What You Should Do
Reduce exposure. Industry volume is expected to be weak in view of the poorer consumer spending. BAT will be affected by regulatory risks and its lost leadership position in pricing. Its dividend yield is too low for the potential risk.
Source: CIMB Daybreak - 02 April 2015
Target RM59.30 (Stock Rating: REDUCE)
Effective today, BAT will increase its cigarette selling prices by RM0.50/pack to RM14/pack for premium cigarettes and RM12.50/pack for VFM sticks due to the implementation of GST. The price hike may cause a slight drop in sales volume given generally-weaker consumer spending. We cut our FY15-17 earnings forecasts by 1-3% as we trim our sales volume assumptions by 1-2%. We maintain Reduce on BAT, with a lower DDM-based target price. For exposure to the tobacco sector, we prefer Gudang Garam. For dividend yield plays, we recommend the brewers.
What Happened
BAT’s cigarette selling prices will increase by RM0.50/pack, effective today. This means that premium cigarettes are now priced at RM14/pack versus RM13.50 before the hike while VFM cigarettes are priced at RM12.50/pack versus RM12 previously. The hike is due to the implementation of GST, which comes into effect today.
What We Think
The increase in selling prices did not come as a surprise as price hikes were expected to accompany the implementation of GST, which will replace the sales tax of 5%. We expect the price hike to cause a slight decline in sales volume given the higher selling prices and general slowdown in consumer spending. Although we are projecting weaker sales volume, we do not expect volumes to experience a large decline as (i) smokers are psychologically ready for the price hike given the wide anticipation following the announcement of GST, and (ii) the price hike of RM0.50/pack is much lower than the increase of RM1.50/pack in Nov 2013, which caused a 18.4% drop in sales volume. Considering this and based on the historical trend, we trim our sales volume assumptions by 1-2%. We believe sales volume will be affected more by the general slowdown in consumer spending on the back of higher living expenses than it will be by the small price increase of RM0.50/pack. Channel checks at convenience stores this morning show that rivals JTI and PMI have not increased prices but they will probably do so soon.
What You Should Do
Reduce exposure. Industry volume is expected to be weak in view of the poorer consumer spending. BAT will be affected by regulatory risks and its lost leadership position in pricing. Its dividend yield is too low for the potential risk.
Source: CIMB Daybreak - 02 April 2015
