Stock Name: BAT
Company Name: BRITISH AMERICAN TOBACCO (M)
Research House: AMMB
Tobacco sector
Recommend neutral: Our latest channel checks revealed that 'the Big 3' tobacco manufacturers have dropped prices of certain cigarette labels, namely those within the premium segment. We understand the discounted labels include Dunhill by British American Tobacco (BAT), Salem by JT International (JTI) and Marlboro variations by Philip Morris.
It appears that the price cuts are not uniform across the Big 3, with certain premium labels available for as low as RM8.90 per pack only at targeted distribution outlets. This compares with the standard retail price of RM9.30 per pack of 20s for a premium label.
Under regulations stipulated by the Malaysian government, tobacco manufacturers are allowed price discounts of up to three times a year, not exceeding 30 days on each occasion. In addition, the Ministry of Health must be notified of any price cuts.
We view this latest development negatively, although we are not surprised by the move. Tobacco manufacturers have engaged in price discounts in the past, mainly with the objective to attain market share.
But unlike previous occasions in 2005 and late 2008, which led to a five-month price war, we see little chance of this happening, given the more tightly regulated environment this time around. We note the 40 sen discount, or less than 5% of the retail price, complies with the quantum allowed by the government.
We are keeping our earnings forecast for BAT and JTI unchanged as impact to FY10F earnings will be insignificant at 0.8% to 1%, assuming one-month discount period.
Given higher advertising expenses and operating costs in preparation for the ban on the 14s pack, which went into effect on June 2, we believe tobacco manufacturers will want to exercise a more systematic marketing strategy to avoid a costly price war.
We maintain a hold call on BAT, with unchanged discounted cash flow-based fair value of RM42, and a buy on JTI with a fair value of RM5.80 due to its better mix of value-for-money brands. We expect JTI to be the greater contender on the back of Winston's strong brand equity with market share growth ' in anticipation of further down-trading activities due to the ban on the 14s pack. ' AmResearch Sdn Bhd
This article appeared in The Edge Financial Daily, June 30, 2010.
Company Name: BRITISH AMERICAN TOBACCO (M)
Research House: AMMB
Tobacco sector
Recommend neutral: Our latest channel checks revealed that 'the Big 3' tobacco manufacturers have dropped prices of certain cigarette labels, namely those within the premium segment. We understand the discounted labels include Dunhill by British American Tobacco (BAT), Salem by JT International (JTI) and Marlboro variations by Philip Morris.
It appears that the price cuts are not uniform across the Big 3, with certain premium labels available for as low as RM8.90 per pack only at targeted distribution outlets. This compares with the standard retail price of RM9.30 per pack of 20s for a premium label.
Under regulations stipulated by the Malaysian government, tobacco manufacturers are allowed price discounts of up to three times a year, not exceeding 30 days on each occasion. In addition, the Ministry of Health must be notified of any price cuts.
We view this latest development negatively, although we are not surprised by the move. Tobacco manufacturers have engaged in price discounts in the past, mainly with the objective to attain market share.
But unlike previous occasions in 2005 and late 2008, which led to a five-month price war, we see little chance of this happening, given the more tightly regulated environment this time around. We note the 40 sen discount, or less than 5% of the retail price, complies with the quantum allowed by the government.
We are keeping our earnings forecast for BAT and JTI unchanged as impact to FY10F earnings will be insignificant at 0.8% to 1%, assuming one-month discount period.
Given higher advertising expenses and operating costs in preparation for the ban on the 14s pack, which went into effect on June 2, we believe tobacco manufacturers will want to exercise a more systematic marketing strategy to avoid a costly price war.
We maintain a hold call on BAT, with unchanged discounted cash flow-based fair value of RM42, and a buy on JTI with a fair value of RM5.80 due to its better mix of value-for-money brands. We expect JTI to be the greater contender on the back of Winston's strong brand equity with market share growth ' in anticipation of further down-trading activities due to the ban on the 14s pack. ' AmResearch Sdn Bhd
This article appeared in The Edge Financial Daily, June 30, 2010.
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