HLIB Sector Update - Tobacco

Stock Name: BAT
Company Name: BRITISH AMERICAN TOBACCO (M)

Research House: HLG

Price Call: HOLD

Target Price: 49.50

Stock Name: JTINTER
Company Name: JT INTERNATIONAL BHD

Research House: HLG

Price Call: HOLD

Target Price: 6.90

Tobacco (NEUTRAL; NEW)

To Smoke or Not To Smoke?

• The tobacco sector is expected to continue experiencing decline in TIValbeit marginally. TIV could decline further if government imposes excise duty(ED) hike. Currently, illicit cigarettes are sitting on considerably highmarket share level of 36.1%.
• Illicit cigarettes decline in 2010 and 2011 due to regulation tighteningand stronger enforcement, coupled with the absence of ED hike during Budget2012.
• The sector has an inelastic demand. Moreover, the increases in cigaretteprices are more than enough to offset the increase in ED. Coupled withcontinued enforcement; earnings are expected to be resilient and highlypredictable.
• The sector is also affected by seasonal factorswhereby 4Q traditionally record lower earnings from lowersales volume due to pre-stocking activities ahead of potential ED hike.
• The advantages of the sector are: (1) High dividend yield stocks; and(2) Countercyclical share price pattern.
• However, current share prices have fully reflected their respectivefundamentals. Hence, we initiate coverage on the sector with a NEUTRAL rating:
• (1) British AmericanTobacco, BAT (HOLD; TP: RM49.50)
• (2) JT International,JTI (HOLD; TP: RM6.90)

Source: HLIB Reserach - 4 April 2012