We will be separating the tobacco sector from our general
consumer sector strategy outlook from here onwards. At this juncture, we are
maintaining our NEUTRAL call on the industry. The tobacco industry has been
experiencing a decline in legal cigarettes volume since 8 years ago in contrast
with the increasing illicit trades. In fact, the absence of any tax hikes in
last Oct has apparently slowed down the booming illicit trades. We however hope
that the government will continue to maintain the tax duties this year and also
continue to lend a hand to shape up the legal industry. On top of that, we also
saw a significant decline of volume in sub-VFM for 2011. This could also be a positive
indication of consumers turning from illicit and sub-VFM to VFM or premium cigarettes
as a result of the absence of tax hikes. Nonetheless, the challenges and obstacles
that the tobacco industry faces remain high with the key challenges being the
continued uncertainties of future excise duty hikes and the continuing high
level of illicit trades. As a result, we remain NEUTRAL on the tobacco sector and
is reiterating our MARKET PERFORM call on BAT with TP of RM52.80.
50/50 chance of an
excise duty hike this year, hence remains neutral. The absence of a hike in
the sin tax in Budget 2012 last year have given the market a positive surprise and
we believe the TIV would likely stabilise this year, provided there is no
additional hike throughout this year. Historically, the government has never
missed to increase the tax at least once for the past 8 years and has increased
it out of the Federal Budget for several years since the first time in 2007.
Thus, we believe that there is still a 50/50 chance of an additional tax hike
this year especially towards the second half of the year and probably after the
general election. We have computed the correlation between tax hikes and TIV
and found that it has historically shown an inverse relationship that held
almost to perfection. In other words, we believe the TIV will be negatively
impacted if there is any further increase of the tax this year. That said, we
remain neutral at this juncture on the back of the absence of any tax
adjustment in the last Budget 2012, a diminishing sub-VFM volumes (-16% YoY)
and a decrease in the illicit trades (-0.2ppt YoY).
Expect slight
improvement in 2012 TIV. The booming sales of illicit cigarettes have softened
in 4Q11 by -1.5ppt QoQ and -0.2ppt YoY. However, the quantum of decrease was not
as ideal as the performance in 4Q10 (-4.2ppt QoQ and -1.2ppt YoY). Moreover,
the current level is
still on the
high side as
compared to 3
years ago, which
in turn negatively impacts the government tax revenue
and at the same time jeopardises the government health agenda to reduce smoking
prevalence and also threatens the legal industry such as BAT, JT International
and Phillip Morris. In the past two years, the first wave (from Mar to Jun) of
the illicit tobacco was the highest among the 3 waves. Assuming the trend
remains, we hope that the first wave for 2012 would at least be maintained or
lesser than the current level of 34.8% for 4Q11 and will continue to decline in
the following two waves. As such, the legal cigarettes would probably make a
rebound above 3.0b sticks or slightly
above 3.5b sticks per quarter. For this year, 2012, we expect the TIV to
improve slightly to 13.4b sticks as compared to 13.3b sticks in 2011. The
better expectation is mainly supported again by the absence of any tax
adjustment in the last Budget 2012 and also the diminishing sub-VFM and lower
illicit trades. We are also anticipating that the history will repeat itself
and that wave 3 would have a stronger volume than the rest mainly caused by the
speculation of an excise hike after a general election as well as before Budget
2013.
Cloudy days ahead?
The challenges and obstacles that the
tobacco industry face remain with the key challenges being the continued
uncertainties of future excise duty hikes and the continuing high level of
illicit trades. Thus, we remain NEUTRAL on the tobacco industry
and reiterate our
MARKET PERFORM call
on BAT with
a TP of
RM52.80. Although we have not included JT International into our
universe yet, we believe BAT will catch the most limelight among its peers as
its market share is light years ahead of the rest in both the premium and VFM
segments. In addition, it would potentially overtake the VFM market share
leadership this year while maintaining its strong market share in the premium segment.
Source: Kenanga
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