Monday, October 4, 2010

BRITISH AMERICAN TOBACCO--SELL(pre-budget price hike)

year in year out it never fails to highlight this kind of pre-budget price hike for tobacco, alcoholic drinks and even empat ekor(gaming) businesses and the conclusion is always SELL and you know why?

BRITISH AMERICAN TOBACCO
Cigarette price hike pre-Budget CONSUMER
· Significant 70 sen increase in retail price
Sin Chew Jit Poh reported yesterday that the price of 20s packs of
cigarettes would be raised to RM10.00 from RM9.30 effective today, citing
the Federation of Sundry Goods Merchants’ Association as its source. We
understand that the Association was notified by BAT of the price increase
via a letter that it received on Saturday. There has yet to be an official
announcement by any of the Big 3 tobacco players, Ministry of Finance or
the Customs Department.
· Likely excise duty hike in budget in addition to cess
The 3.5 sen per stick retail price hike is BAT’s move in anticipation of
lower sales volumes resulting from an increase in excise duties widely
expected close to the Budget 2011 announcement on 15 October 2010,
as well as the impending implementation of the cess of 0.5 sen per stick
announced by the National Kenaf and Tobacco Board (LKTN) on 10
August 2010. Excise duties currently stand at 19.0 sen per stick. Based
on the historical tax-led price adjustment of 1.5x over the excise duty hike
and taking into account the cess, we anticipate a 1.8 sen rise in excise
duties to c.20.8 sen.
· Earnings estimates unchanged
We are maintaining our earnings estimates as our assumptions already
imputed a 7.5% increase in cigarette prices and corresponding 5.5%
decline in sales volumes.
· Downgrade to Sell
DCF-based target price held at RM43.00 but lowering our
recommendation to a Sell. Given the recent run-up in BAT’s share price,
our prospective FY10 net dividend yield of 5.0% makes the stock less
attractive from a defensive stand point. The tobacco sector continues to
face strong negative headwinds of tightening regulation and competition
from high levels of illicit trade (37.5% in FY09)

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