OSK: Maintain NEUTRAL at RM43.80, TP RM42.18 for BAT

BAT against all odds

British American Tobacco (M) Bhd
(July 14, RM44.00)Maintain neutral at RM43.80 with target price RM42.18: BAT’s 1HFY2010 results are slated to be released next Thursday. Overall we see flat or weaker year-on-year (y-o-y) earnings growth in low single digits at the net level on the back of weakening sales and higher operating costs with the implementation of the “reloc” packaging.

The earnings weakness impact will, however, be partially mitigated by higher selling prices following a price revision last year in response to the hike in tobacco excise duties. In late September last year, tobacco excise duties were raised by 1 sen per stick (p/s), lifting tobacco duty to 19 sen p/s. Subsequently, tobacco manufacturers raised cigarette selling prices by 1.5 sen p/s to pass on the cost to consumers.

In our April 23, 2010 report reviewing BAT’s 1QFY2010 results, we had expected tobacco total industry volume (TiV) to be flat y-o-y. However, BAT’s volume declined slightly by 2.9%. We believe this was mainly due to downtrading activities, as could be seen from the growth in market share of value-for-money (VFM)-type cigarettes to 22% from 21% previously.

BAT’s share of VFM-type cigarettes fell to 36.5% from 37.1% a year earlier. Its shrinking share of the VFM segment is likely to be due to the strengthening of rival JT International Bhd’s flagship VFM cigarette brand, Winston, which currently dominates the market.

Although we do not see many changes for the coming quarter’s y-o-y earnings performance, we expect see things get more exciting in 2H2010.

Recently, BAT relaunched its Peter Stuyvesant (PS) brand, previously a premium cigarette, as a VFM-type cigarette. Priced at RM7.80, PS is BAT’s answer to JTI’s dominance in VFM via Winston.

Meanwhile, at the latest update illicit trade currently stands at 37.5%, down slightly from 38.7% previously.

This may indicate that illicit trade of tobacco products may have stabilised or has tapered off slightly due to greater enforcement by the authorities. — OSK Investment Research, July 14


This article appeared in The Edge Financial Daily, July 15, 2010.