Stock Name: BAT
Company Name: BRITISH AMERICAN TOBACCO (M)
British American Tobacco (M) Bhd
(Oct 18, RM44.80)
Maintain underperform at RM44.90 with fair value of RM42.40: British American Tobacco (BAT) is expected to release its 3QFY11 results tomorrow. We believe 9MFY11 earnings will be in line with our estimates and come in at RM890 million to RM900 million, which would account for 76% to 77% of our full-year forecasts.
We do not discount the possibility that BAT increased its market share by about 100 to 200 basis points to about 61.4% to 61.5%, driven by its its Dunhill Switch/Boost brands for the premium segment and Pall Mall Ice for the value for money (VFM) segment. The Dunhill Switch/Boost variants, which contain the innovative menthol capsule, were launched earlier this year and have grown Dunhill's market share by about 2.6% since they were launched in 1QFY11 to 44.6% (from 42.2% in January 2011). However, to be conservative, we are keeping to our assumptions of a flat market share of about 61.3% for now.
In October 2010, the industry went through a steep excise duty increase of three sen per stick which resulted in the total industry volume (TIV) declining by 16.7% year-on-year (y-o-y) in 4QFY10. However, as there was no excise duty hike for cigarettes in Budget 2012, we expect 4QFY11 TIV to decline at a slower rate of 4%-5% y-o-y, which would bring TIV for FY11 to a decline of 5%-6% y-o-y, in line with our estimates. Without the hike in excise duties, the price differential between legal and illegal cigarettes remains relatively small, which we expect will ease the growth of the illicit trade volume, currently accounting for about 37% of the overall market.
Despite being spared an excise duty hike, we believe that the long-term earnings outlook remains cloudy for the industry. We expect that excise duties for cigarettes will continue to rise in the future, given the health risks associated with the product. Our view is that the government did not raise the excise duties due to the current large volume of the illicit cigarette market. As such, we believe that once the government has the illicit trade under control, excise duties could be raised again, thus putting more downward pressure on TIV. Although we do not expect this to happen in FY11, we believe that in FY12, the risk of an earlier than expected hike in excise duty is high.
The key risks include: (i) more government campaigns to discourage smoking, like a potential ban on smoking in public which may turn potential new smokers away; and (ii) increasing illicit cigarettes market.
We make no change to our earnings forecasts. Our discounted cash flow-derived fair value remains unchanged at RM42.40 based on weighted average cost of capital of 7.6%. Although we believe that BAT's near-term outlook is positive, buoyed by the lack of an excise duty hike, we believe that its long-term outlook remains cloudy, underpinned by the risk of a steeper excise duty hike in the future. We reiterate our 'underperform' call on the stock. ' RHB Research, Oct 18
This article appeared in The Edge Financial Daily, Ocotber 19, 2011.
Company Name: BRITISH AMERICAN TOBACCO (M)
| Research House: RHB | Price Call: SELL | Target Price: 42.40 |
British American Tobacco (M) Bhd
(Oct 18, RM44.80)
Maintain underperform at RM44.90 with fair value of RM42.40: British American Tobacco (BAT) is expected to release its 3QFY11 results tomorrow. We believe 9MFY11 earnings will be in line with our estimates and come in at RM890 million to RM900 million, which would account for 76% to 77% of our full-year forecasts.
We do not discount the possibility that BAT increased its market share by about 100 to 200 basis points to about 61.4% to 61.5%, driven by its its Dunhill Switch/Boost brands for the premium segment and Pall Mall Ice for the value for money (VFM) segment. The Dunhill Switch/Boost variants, which contain the innovative menthol capsule, were launched earlier this year and have grown Dunhill's market share by about 2.6% since they were launched in 1QFY11 to 44.6% (from 42.2% in January 2011). However, to be conservative, we are keeping to our assumptions of a flat market share of about 61.3% for now.
In October 2010, the industry went through a steep excise duty increase of three sen per stick which resulted in the total industry volume (TIV) declining by 16.7% year-on-year (y-o-y) in 4QFY10. However, as there was no excise duty hike for cigarettes in Budget 2012, we expect 4QFY11 TIV to decline at a slower rate of 4%-5% y-o-y, which would bring TIV for FY11 to a decline of 5%-6% y-o-y, in line with our estimates. Without the hike in excise duties, the price differential between legal and illegal cigarettes remains relatively small, which we expect will ease the growth of the illicit trade volume, currently accounting for about 37% of the overall market.
Despite being spared an excise duty hike, we believe that the long-term earnings outlook remains cloudy for the industry. We expect that excise duties for cigarettes will continue to rise in the future, given the health risks associated with the product. Our view is that the government did not raise the excise duties due to the current large volume of the illicit cigarette market. As such, we believe that once the government has the illicit trade under control, excise duties could be raised again, thus putting more downward pressure on TIV. Although we do not expect this to happen in FY11, we believe that in FY12, the risk of an earlier than expected hike in excise duty is high.
The key risks include: (i) more government campaigns to discourage smoking, like a potential ban on smoking in public which may turn potential new smokers away; and (ii) increasing illicit cigarettes market.
We make no change to our earnings forecasts. Our discounted cash flow-derived fair value remains unchanged at RM42.40 based on weighted average cost of capital of 7.6%. Although we believe that BAT's near-term outlook is positive, buoyed by the lack of an excise duty hike, we believe that its long-term outlook remains cloudy, underpinned by the risk of a steeper excise duty hike in the future. We reiterate our 'underperform' call on the stock. ' RHB Research, Oct 18
This article appeared in The Edge Financial Daily, Ocotber 19, 2011.
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