SMOKING HOT: BAT shares jump RM1.70, its highest in five weeks
Investors were unfazed by the drastic increase in cigarette prices as they pushed British American Tobacco Bhd (BAT)
shares to its highest level in five weeks.
BAT was Bursa Malaysia’s top gainer as it soared RM1.70 to RM64.20, despite raising its cigarette prices by as much as RM1.50 yesterday.
In contrast, JT International Bhd (JTI) — the only other listed cigarette company — eased one sen to RM6.36, as it announced that its new prices will only be effective today.
The prices for BAT’s premium (Dunhill and Kent) and aspirational premium (Peter Stuyvesant and Pall Mall) brands went up RM1.50 to
RM12 and RM10.50 per pack, respectively.
The new retail prices for JTI’s Mevius and Salem cigarettes are RM12 per pack while Winston is RM10.50 per pack.
The price increase was in response to a 14 per cent hike in excise duty set by the Royal Customs on Friday, bringing the total excise duty per box of 20 sticks to RM5.
This is BAT’s third price hike over the last two years.
RHB Research says BAT will be able to weather the price increase due to its grip on the premium cigarette segment, where
demand is less elastic and contributes to more than 70 per cent of the company’s sales.
Furthermore, BAT’s contract manufacturing business, which contributes about 10 per cent to group revenue, is unaffected by domestic cigarette demand.
Kenanga Research said BAT has been making good progress in strengthening its market leadership over the years.
However, overall legal market consumption has been declining due to increasing competition from illicit white cigarettes, the firm noted.
The higher cigarette prices will also fuel further risk in the already high level of illicit cigarette consumption in Malaysia, where illegal brands are being sold for as little as RM3.50.
Kenanga Research has slightly revised its target price on BAT to RM63 from RM61.36, although this seems "outdated" based on the stock's closing price of RM64.20 yesterday.
The revised price is based on an unchanged targeted price-to-earning ratio of 20 times on next year's forecast earnings per share of 315.2 sen.
Meanwhile, Affin Investment Bank believes with the higher average selling prices of legal cigarettes, smokers will likely resort to downtrading or consuming smuggled cigarettes.
With illegal cigarettes relatively easier to source - in a direct competition to BAT, JTI and unlisted Philip Morris International Sdn Bhd's brand portfolio - the legal cigarettes volume growth will be dampened further.
Affin Investment and RHB Research have maintained an "underweight" outlook on this sector.