BRITISH AMERICAN TOBACCO (M) BHD

THE government’s desire to recover at least RM1bil in tax leakages is a strong statement of intent, according to Affin Hwang Capital. It said that this would imply 2.5 billion cigarette sticks or 15 percentage points recoup in legal market share from year-to-date illicit market share of 63%.

“While we had earlier anticipated a proclamation of action against the illicit trade as well as a rain-check on raising excise duties this year, we conservatively assumed an eight percentage points legal market share gain in 2019 in our forecasts.

“The ban on smoking at outdoor eateries was also formally announced during the Budget speech starting Jan 1, 2019, of which we are largely neutral towards while awaiting further details on its implementation process.”

Subsequent to the Budget announcement, the research house said British American Tobacco (M) Bhd (BAT) also announced the official sales and service tax-driven price hike for their cigarette brands at 40 sen per pack or 2.4% to 3.3%, effective immediately.

“We earlier mentioned that the price hike, at such levels, would be able to protect margins without causing a shock to volume sales, in our view. The quantum of price hike for the other tobacco players should also be revealed soon.”

The research house said it is maintaining a buy call on BAT.

“We tweak 2018 to 2020 earnings per share higher by 0.5%, 3.1% and 3.1% respectively after pricing in gross margin improvement from the price hike. The set of news should act as a re-rating catalyst for the stock, which remains largely below its fair value, while offering attractive yields of 4.4% to 6.3%.

“Reiterate our ‘buy’ call on BAT, with a revised 12-month dividend discount model-derived target price of RM40.20. Downside risks include slower-than-expected enforcement activities and aggressive excise duty shocks.”