Stock Name: BAT
Company Name: BRITISH AMERICAN TOBACCO (M)
Tobacco sector
Maintain neutral: With Budget 2012 fast approaching, we are of the view that tobacco manufacturers are unlikely to get a reprieve from a hike in tobacco excise duty. Our view is underpinned by the government's long-standing stance against smoking and its intention to reduce the budget deficit.
Similar to last year, we expect the industry to be subject to a moderate hike of one or two sen per stick in excise duty, on par with its historical average. This represents an increase of 4.5% to 9% from the current excise duty of 22 sen per stick. Note that tobacco excise duty has been raised in the past six consecutive years. The government reverted to a punitive hike of three sen per stick last year, after a symbolic increase of'' one sen in 2009.
Based on past record, manufacturers typically take the opportunity to nudge up their margins by passing down a quantum higher than the additional excise duty-led costs to compensate for shrinking sales volume. However, we reckon manufacturers are most likely to opt for a minimal mark-up in profit this time around, given the current psychological retail selling price of RM10 per pack (premium 20s). In the last off-budget price hike, only 14% of total increase was excise duty-related (2009: 33%).
We maintain our total industry volume (TIV) growth forecast at -4% for 2011 and -3% for 2012. Legitimate TIV is negatively correlated to excise duty. This is evident in the downward trend in TIV since 2003. Based on our sensitivity analysis, a 10 sen per pack hike on top of an excise-duty led increase of 20 sen per pack (one sen per stick) could trim our FY12F earnings forecasts by 0.5% to 0.8%, assuming a 5% decline in TIV per year. However, earnings cut will be a higher 2% to 6% if excise duty is raised by'' two sen per stick.
We maintain 'neutral' on the tobacco sector, with 'holds' on both British American Tobacco (M) Bhd (BAT, fair value: RM45.90 per share) and JT International Trading Sdn Bhd (JTI, FV: RM7.20). While the industry has always been flexible enough to adapt to regulatory changes, the operating environment remains challenging and lacks positive catalysts.
Firstly, the high levels of illicits at circa 33% continue to hamper legitimate TIV growth. This perennial issue is estimated to cost the government RM2 billion in corporate taxes per year. Surely, any cutbacks in ease of access to illicits would boost the legitimate TIV pie.
Secondly, the proliferation of sub-VFM (value-for-money) or ELPC (exceptionally low-priced cigarettes) also contributes to depressed TIV growth. This, coupled with the illegal sales of cigarettes below the minimum price of RM7 per pack, would accentuate the loss of market share by the Big Three manufacturers (BAT, JTI and Philip Morris International). This invariably exerts a downward pressure on earnings growth of BAT and JTI.
Notwithstanding the benign industry outlook, tobacco stocks are still widely held for their decent dividend yields and defensive attributes. The share price performance tends to outperform the market index during times of uncertainty. The share prices of BAT and JTI rose 21% and 36% against the FBM KLCI's -42% during the 2008 global financial crisis. At current prices, both BAT and JTI offer investors dividend yields of 5.5% and 5.3%, respectively. Our dividend per share forecast is premised on a dividend payout of 93% for BAT and 70% for JTI. ' AmReseach, Sept 22
This article appeared in The Edge Financial Daily, September 23, 2011.
Company Name: BRITISH AMERICAN TOBACCO (M)
| Research House: AMMB | Price Call: HOLD | Target Price: 45.90 |
Tobacco sector
Maintain neutral: With Budget 2012 fast approaching, we are of the view that tobacco manufacturers are unlikely to get a reprieve from a hike in tobacco excise duty. Our view is underpinned by the government's long-standing stance against smoking and its intention to reduce the budget deficit.
Similar to last year, we expect the industry to be subject to a moderate hike of one or two sen per stick in excise duty, on par with its historical average. This represents an increase of 4.5% to 9% from the current excise duty of 22 sen per stick. Note that tobacco excise duty has been raised in the past six consecutive years. The government reverted to a punitive hike of three sen per stick last year, after a symbolic increase of'' one sen in 2009.
Based on past record, manufacturers typically take the opportunity to nudge up their margins by passing down a quantum higher than the additional excise duty-led costs to compensate for shrinking sales volume. However, we reckon manufacturers are most likely to opt for a minimal mark-up in profit this time around, given the current psychological retail selling price of RM10 per pack (premium 20s). In the last off-budget price hike, only 14% of total increase was excise duty-related (2009: 33%).
We maintain our total industry volume (TIV) growth forecast at -4% for 2011 and -3% for 2012. Legitimate TIV is negatively correlated to excise duty. This is evident in the downward trend in TIV since 2003. Based on our sensitivity analysis, a 10 sen per pack hike on top of an excise-duty led increase of 20 sen per pack (one sen per stick) could trim our FY12F earnings forecasts by 0.5% to 0.8%, assuming a 5% decline in TIV per year. However, earnings cut will be a higher 2% to 6% if excise duty is raised by'' two sen per stick.
We maintain 'neutral' on the tobacco sector, with 'holds' on both British American Tobacco (M) Bhd (BAT, fair value: RM45.90 per share) and JT International Trading Sdn Bhd (JTI, FV: RM7.20). While the industry has always been flexible enough to adapt to regulatory changes, the operating environment remains challenging and lacks positive catalysts.
Firstly, the high levels of illicits at circa 33% continue to hamper legitimate TIV growth. This perennial issue is estimated to cost the government RM2 billion in corporate taxes per year. Surely, any cutbacks in ease of access to illicits would boost the legitimate TIV pie.
Secondly, the proliferation of sub-VFM (value-for-money) or ELPC (exceptionally low-priced cigarettes) also contributes to depressed TIV growth. This, coupled with the illegal sales of cigarettes below the minimum price of RM7 per pack, would accentuate the loss of market share by the Big Three manufacturers (BAT, JTI and Philip Morris International). This invariably exerts a downward pressure on earnings growth of BAT and JTI.
Notwithstanding the benign industry outlook, tobacco stocks are still widely held for their decent dividend yields and defensive attributes. The share price performance tends to outperform the market index during times of uncertainty. The share prices of BAT and JTI rose 21% and 36% against the FBM KLCI's -42% during the 2008 global financial crisis. At current prices, both BAT and JTI offer investors dividend yields of 5.5% and 5.3%, respectively. Our dividend per share forecast is premised on a dividend payout of 93% for BAT and 70% for JTI. ' AmReseach, Sept 22
This article appeared in The Edge Financial Daily, September 23, 2011.
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