Total industry volume (TIV) on a YoY basis has performed
better than expected in 1Q12 due to the absence of any tax hikes (much like a
stand tide, where there are no changes in the tide’s level) and an increased
purchasing power, which has resulted in consumers switching from illicit and
sub-value for money (sub-VFM) cigarettes to premium cigarettes. In addition, we
are also expecting higher volumes in end-2Q and the 3Q, mainly driven by likely
higher consumptions during the Olympic and EURO games. However, we still think
that there is still a 50% chance of an increase in tax duties after the general
election, say in the 4Q, and this will then likely pull back the volume
growth. As a result, although we have been
seeing improvement in the legal industry in terms of both values and volumes in
1Q12, we are still maintaining our overall NEUTRAL view on the Tobacco sector. Challenges
and obstacles that the industry face remain high with the key challenges being
the continued uncertainties in future excise duty hikes and the continuing high
level of illicit trades. Hence, we
continue to remain NEUTRAL on the sector and is reiterating our MARKET
PERFORM call on BAT with a TP of RM55.10.
TIV improved better
than expected. The 1Q12 TIV improved 8% YoY on the back of the absence of a
tax hike in Budget 2012 last year. Further, the government’s generous goodies distribution
to the households since Budget 2012 also has had a positive spillover effect to
the tobacco industry. We note that there has also been a big switch in the
consumption behavior, with consumers moving from illicit and sub-VFM cigarettes
to premium cigarettes, especially in the suburban areas after an increased in
their purchasing powers. The TIV improvement is actually in line with our
expectation as mentioned earlier in our report dated 28 March 2012, which we
expected the TIV to improve slightly this year to 13.4b sticks from 13.3b
sticks in 2011.
Greater volumes
flowing into the legal industry. Given the backdrop of the absence of tax
hikes and the decline in illicit trades, we are expecting higher volume sales,
driven by the athletic games, to flow into the legal industry. As shown in
Figure 1, we actually observe that the years with athletic games somehow do
give a boost to either the legal industry or illicit trades volume. Thus, with
the UEFA EURO and Olympic games in the current and coming months, the 2Q12 and
3Q12 TIV will likely continue to improve.
All risks falling on
next tax hike. Our main concern is the timing of the next tax hike that will
kick in. In our view, there is still a 50/50 chance of a tax hike towards the
end of this year and this will most likely be after the general election. If a
tax hike is implemented in 4Q12, we believe the negative impact will likely be
seen in 2013. Although 4Q12’s TIV will potentially be affected, we remain
positive on our forecast of a slight improvement in the overall TIV for the year
if better volumes are successfully recorded for at least the current and next
quarter.
Although we have seen improvement in both BAT and JTI for
their 1Q12 results, 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 after seven
consecutive years of decline seen in the TIV. Thus, we continue to remain NEUTRAL
on the tobacco industry and are maintaining our MARKET PERFORM call on BAT with
a TP of RM55.10. Although we have not included JT International into our
coverage yet, we believe that BAT will catch the most limelight among its peers
as its market share is light years ahead of the rest especially in the premium
segment.
Source: Kenanga
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