Monday 22 October 2012

Tobacco - Pricier Smokes From BAT

THE BUZZ  

Bernama and several publications reported that BAT announced a RM0.20 per pack price increase  for  all  its  cigarettes  brands  beginning  22  Oct.  A  visit  to  convenience  stores showed that the price increase has indeed taken place. Dunhill will now sell for RM10.20 per pack, while BAT’s Value-for-Money (VFM) brands like Pall Mall will retail for RM8.70 per pack. JTI’s and PMI’s cigarettes remain priced at the original RM10 for Premium brands and RM8.50 for VFM brands.

OUR TAKE  

A  surprise.  The  news  articles  provided  little  detail  on  whether  the  Government  had chosen to raise tobacco excise duties off-budget by RM0.01 per stick to RM0.23 per stick. BAT’s MD William Toh told the press that excise and sales tax payable had increased as a result of the Royal Malaysian Customs’ mandated uplift in cigarette ex-factory pricing of between  26%-58%,  which  initially  suggested  that  there  has indeed  been  an excise  hike. Convenience stores, however, continue to sell non-BAT brands at the original prices, an indication that the increase is a company-specific initiative.

A moderate hike. The RM0.20 per pack price increase is a moderate one, raising BAT’s Premium  and  VFM  cigarette  prices  by  2.0%  and  2.4%  respectively.  As  Premium cigarettes  had  previously  already  broken  the  RM10-per-pack  psychological  price  barrier, we  expect  any  volume reduction in BAT’s Premium  sales  to  be  minor.  Its  VFM  volumes should see a bigger plunge, given its target consumers’ higher price sensitivity.
 
JTI and PMI matching BAT’s prices? We don’t expect much consumer migration toward illicit, duty-unpaid cigarettes if legal alternatives (like PMI’s Marlboro and JTI’s Mild Seven for  the  Premium  segment  and  JTI’s Winston  for  the  VFM  segment)  remain  priced  at  the original RM10 and RM8.50 per pack for the Premium and VFM segments respectively. A switch  by  less  brand-loyal  smokers  towards  other  legal  brands  appears  more  likely.  JTI and  PMI  has  historically  matched  BAT’s pricing, however, so we should see pricing differentials disappear in a few days and instead see some rise in illicit trade.

Fatter margins, thinner volumes. We will still need to check with BAT’s management to better  understand  the  rationale  behind  the  price  increase.  Should  there  be  no  additional financial  obligations  towards  the  Government  (ie.  more  tobacco-related  taxes),  the  price increase  may  well  be  an  overall  positive  for  BAT.  Over  84.7% of the company’s sales volume is in the Premium segment, where consumers are less price-sensitive.

Maintain NEUTRAL. We maintain our forecasts and FV of BAT at RM56.92 (NEUTRAL) pending  a  chat  with  management.  If  there  is  an  industry-wide  price  increase,  industry volumes should contract again in FY13, with BAT’s sales volumes expected to decline by 0.7%  y-o-y.  The  moderate  price  increase  may  be  a  smart  move  for  BAT  if  there  are  no additional  financial  obligations  to  the  Government,  in view of the company’s  less  price-sensitive customer base.


Source: OSK

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