British American Tobacco (M) Bhd
(Sept 20, RM45.64)
Downgrade to fully valued at RM47.60 with target price of RM41.20: We believe there will be another round of excise duty hikes this year, before or during the Budget 2011 speech on Oct 15, amid the government’s constant drive to reduce smoking. Higher duty would increase the government’s tax revenue, estimated at RM2.5 billion in 2009 (+2.9% year-on-year) despite an 11% decline in legal industry volume (LTIV). Based on our sensitivity analysis, a 5% to 10% increase in excise duty would reduce FY2010F/12F earnings by 1% to 5%, assuming full tax pass-on to consumers and 0.5 to 1 percentage point decline in LTIV. Consequently, this would lower our discount dividend model-based (DDM) target price slightly to RM40.40 from RM40.80.
The Illicit trade in duty unpaid cigarettes remains high, accounting for 37% to 38% currently (against 25.7% in 2008) of the total cigarette market, hence dampening LTIV in Malaysia. Key factors to the burgeoning illicit trade are: (i) the widening price gap between legal and illegal cigarettes; and (ii) a lack of strict penalties on offenders including smugglers, consumers and retailers.
BAT share price rose 10% year-to-date and pushed the PER multiple to a 10-year high of 18 times (last peak in August 2004). There is limited upside potential amid the dim outlook for legal manufacturers clouded by high illicit trade. Therefore, we downgrade our call to “fully valued” (previously “hold”) but maintain our target price at RM41.20. However, its prospective net yield of 5% may provide some buffer. — HwangDBS Vickers Research, Sept 20
This article appeared in The Edge Financial Daily, September 21, 2010.
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