‘EX­CISE-LED PRICE HIKE CAN BE FA­TAL TO BAT’

Firm will have to raise prices by big­ger quan­tum to mit­i­gate ef­fects, say HLIB

New Straits Times - - Business -

FARAH ADILLA

KUALA LUMPUR bt@me­di­aprima.com.my

AN­OTHER ex­cise-led price hike in cig­a­rettes could be “fa­tal” to Bri­tish Amer­i­can To­bacco (M) Bhd (BAT), but an­a­lysts said the ef­fects could be mit­i­gated if the com­pany in­creased prices by a quan­tum greater than the hike.

Hong Leong In­vest­ment Bank Bhd (HLIB) said the in­dus­try was still ex­pe­ri­enc­ing pains from the last ex­cise-led price hike of 40 per cent in Novem­ber 2015.

“Soft­ness in con­sumer sen­ti­ment per­sists, while af­ford­abil­ity re­mains a per­ti­nent is­sue. His­tor­i­cally, a price hike is an evo­lu­tion of an ex­cise re­vi­sion. An­other ex­cise-led price hike in the near term could prove fa­tal for BAT,” it said in a re­port yes­ter­day.

HLIB said the po­ten­tial hike would push prices above the RM20 psy­cho­log­i­cal bar­rier for con­sumers.

Dur­ing the fi­nan­cial year 2016, BAT’s and in­dus­try vol­umes con­tracted 29.7 and 25.7 per cent, re­spec­tively, thanks to the Novem­ber 2015 ex­cise duty re­vi­sion, while the il­licit mar­ket share grew to a record 51.2 per cent.

A lo­cal daily re­ported that the gov­ern­ment was con­sid­er­ing in­creas­ing cig­a­rette prices to RM21.50 per pack from RM17 cur­rently, which would be a 26.5 of the Royale Chu­lan Cher­at­ing.

“Capex will also be de­ployed for new BHPetrol ser­vice sta­tions to ex­pand our re­tail petroleum net­work,” said Lodin in its an­nual re­port 2016.

For the fi­nan­cial year ended De­cem­ber 31 2016 (FY2016) Boustead’s pre-tax profit rose by 175 per cent to RM740.4 mil­lion, com­pared with RM269.2 mil­lion in 2015. per cent in­crease.

The gov­ern­ment may also in­crease the le­gal age to buy cig­a­rettes to 21 from 18 cur­rently, and in­tro­duce plain pack­ag­ing boxes in a bid to de­ter smok­ing.

HLIB said based on the Novem­ber 2015 ex­pe­ri­ence, a sim­ple lin­ear ex­trap­o­la­tion im­plied that a RM4.50, or 26 per cent, price in­crease would sug­gest a to­tal in­dus­try vol­ume (TIV) de­cline of 34 per cent.

It said as­sum­ing 34 per cent de­cline in TIV and RM4.50 price hike due to ex­cise du­ties, BAT’s fi­nan­cial years 2017 (FY2017), 2018 and 2019 earn­ings would de­cline 39 to 43 per cent.

“BAT will con­tinue to suf­fer from price-based sub­sti­tu­tion as con­sumer af­ford­abil­ity re­mains the key is­sue, while the pie of smok­ers within the le­gal in­dus­try will con­tinue to shrink.”

HLIB said while the risk of TIV de­cline had cer­tainly height­ened, there were green shoots from

How­ever, rev­enue slipped three per cent to RM8.37 bil­lion from RM8.66 bil­lion pre­vi­ously, due to lower con­tri­bu­tion from the heavy in­dus­tries di­vi­sion.

He said FY2016 was chal­leng­ing as mar­ket forces weighed down the group’s po­ten­tial, but most di­vi­sions per­formed above ex­pec­ta­tions on strength­ened re­solve to im­prove ef­fi­cien­cies, un­lock value and fo­cus on the bot­tom line. BAT’s move to an as­set-light model via the out­sourc­ing of its man­u­fac­tur­ing.

It main­tained a “hold” call on BAT, with an un­changed tar­get price of RM48.23.

Mean­while, CIMB Re­search said al­though de­clin­ing vol­umes re­mained an un­der­ly­ing con­cern, it ex­pected bet­ter prof­itabil­ity for BAT from pro­duc­tion out­sourc­ing.

Nev­er­the­less, it es­ti­mated that a five per cent de­cline in sales vol­ume would neg­a­tively af­fect BAT’s FY2017 to FY2019 fore­cast earn­ings by 5.2 per cent. This is as­sum­ing that the net in­crease in av­er­age sell­ing prices was equiv­a­lent to the quan­tum of ex­cise duty hike.

BAT closed 44 sen lower to RM45, with 657,800 shares traded yes­ter­day.

Lodin said the group’s di­ver­si­fied na­ture had en­abled Boustead to gen­er­ate a hand­some profit in try­ing times.

Mov­ing for­ward, he said the year ahead was not ex­pected to be rosy, with cer­tain global geopo­lit­i­cal shifts im­pact­ing the coun­try.

How­ever, Lodin said the group was bullish that it would weather these storms to de­liver an­other set of good earn­ings. Bernama

Boustead Hold­ings Bhd plans new BHPetrol ser­vice sta­tions to ex­pand its re­tail petroleum net­work.

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