‘EXCISE-LED PRICE HIKE CAN BE FATAL TO BAT’
Firm will have to raise prices by bigger quantum to mitigate effects, say HLIB
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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.