Tobacco Smoking Takes A Toll…On The Wallet
Underweight. The hefty 14% increase in tobacco excise duty will exacerbate the contraction in industry tobacco volumes which could decline by 6-7% in 2014, based on historical trends. BAT’s price hike of
7.5-8.0sen per stick more than compensates for the 3sen/stick excise
increase, but the offset would be an expected increase in downtrading activity and the decline in industry volumes. Our forecasts are maintained for now but this move is negative for the sector. Our Underweight call is maintained but in such a circumstance, we prefer JTIover BAT, for the former is in a better position to benefit from downtrading activities.
A larger-than-expected increase in excise duty. Tobacco excise duty has been raised by 14% from 22sen/stick to 25sen/stick. Certainly, while we have expected a rise in sin taxes this year to contain the govenrment’s budget deficit, the quantum increase was not. BAT says it is shocked and disappointed over the increment which it calls excessive.
A further contraction in industry volume looks inevitable. When prices were raised by 7.5-9% per box in 2010, industry volumes contracted by 3.5%. Given that the current increase is about double the previous round, we could be looking at a contraction of 6-7% in 2014 industry volumes.
BAT responds by hiking prices.Based on our counter checks, BAT has effectively raised prices today by14-17%. This is on top of a 3% price hike in June 2013, which was to compensate for higher operating overheads from inflation and rising labour costs and still high levels of
illicit trade. As such, a box of Dunhill, for instance, is now MYR12.00/box vs MYR10.20/box at the beginning of the year. On a per stick basis, BAT has raised prices by 7.5-8.0sen per stick.
Rest have yet to follow suit.Based on our channel checks, competitors JTI and Philip Morris have yet to follow suit but it is likely just a matter of time, in our view.
BAT’s price increase more than compensates for the hike in excise duty, but its market share is likely to be impacted as this move will further exacerbate the shift to illegals and downtrading. As it stands, BAT’s market share has been declining – 2Q13 volume contracted 1.8% YoY vs the Big 3 industry’s 0.5% dip. Hence, BAT’s 2Q13 market share dropped 1.4 ppt to 63% in 2Q13 vs 64% in 2Q12. SELL maintained with an unchanged DCF-derived TP of MYR55.00.
Tobacco Peerr Valuation ((click to enlarge):
by Maybak IB