STOCKSTALK | NOVEMBER 11, 2015 7:30AM
BAT: Choking on high excise duty
XAVIER@KINIBIZ.COM
British American Tobacco
(Malaysia) Bhd recently raised its prices by a very surprising quantum,
citing an unprecedented excise duty hike as the main reason. Will this be
the blow that knocks out BAT?
Business model: British American Tobacco (Malaysia) Bhd (BAT) came into existence
in November 1999, when Rothmans of Pall Mall (Malaysia) Bhd merged with Malaysian
Tobacco Co Bhd. The group specialises in the manufacture, import and sale of cigarettes
and holds a 62% market share of the local tobacco sector. The group fields Dunhill,
Kent, Pall Mall,Peter Stuyvesant, Lucky Strike, Benson & Hedges and Rothmans as its
brands.
Previously already faced with compressed margins due to the the implementation of the
goods and services tax (GST), which came with its own anti-profiteering clause, almost
continuous excise duty hikes since 2004 (excluding 2011 and 2012), as well as the recent
evolution of the e-cigarette to the industry-disruptive vape, BAT now faces yet another
hurdle in the form of an off-Budget excise duty hike, which the group’s managing
director has noted was “more than 40%”.
This, in turn, led to a price hike of between 20% and 26% for its stable of brands, in the
form of an increase of RM3.20 across the board. This represents a hike of 12 sen per
cigarette. A few days after BAT hiked their prices, fellow tobacco companies Japan
Tobacco International (JTI) and Philip Morris International (PMI) hiked their prices by
RM3.20 across their brand stables as well.
Shareholders and management: Parent company British American Tobacco Plc
holds a 50% stake in the shares of the company, with the next largest stake held by the
Employees Provident Fund (7.92%), followed by Aberdeen Asset Management Plc
(6.32%).
As managing director, BAT fields Stefano Clini, who was appointed to the post in July,
2013. Before joining BAT, Clini held a number of senior positions in Procter & Gamble, a
US multinational consumer goods company, before he took over as chief executive
officer and president of Heinz Italia. After that, Clini took on the role of president of
global infant and nutrition at HJ Heinz for three years before joining BAT.
The chairman of the board of directors is Mohamad Salim Fateh Din, who has held the
position since April 2012. Salim also has interests in Gapurna Sdn Bhd, which deals in
construction, property investment, and property development, with hallmark projects
including 348 Sentral at KL Sentral and PJ Sentral Garden City. Salim is also the group
managing director of Malaysian Resources Corp Bhd.
Also on the board is Oh Chong Peng as an independent non-executive director. Oh is
also affiliated with Alliance Financial Group Bhd, as chairman of the group, and is also
connected to several other companies like Kumpulan Europlus Bhd, Malayan Flour
Mills Bhd and Dialog Group Bhd among others.
Also featured on the board is Zainun Aishah Ahmad, as an independent non-executive
director. She also serves as a director of Degem Bhd, Scomi Engineering Bhd, Shell
Refinery Co (Federation of Malaya) Bhd and Berjaya Food Bhd.
Share
performance: BAT’s share price, as seen in the table, has been taking a beating
recently, having fallen from RM64.20 on Oct 27, 2015, to RM59.94 of Nov 9, 2015,
following the news of the excise duty hike as well as the raised prices for BAT’s stable of
brands.
BAT’s current share price is a far cry from its intra-year high of RM73, which it achieved
on Dec 1, 2014, showing a recovery from the price hike announcement in November
2014. However, the current price still places BAT very close to its intra-year low of
RM59, which it saw twice over the past year.
What analysts
think: Analysts range between neutral to negative on the announcement of the price
hike, though all agreed to being surprised by the quantum of the excise duty hike, which
happened off-Budget, in keeping with the trend of previous excise duty hikes.
The increase was for 12 sen per cigarette stick, which is four times that of the hike in
November 2014, which saw the hike come in at 3 sen per stick.
However, one thing noted was that this current price hike, which pushes cigarettes to
the better part of RM20 per box, has breached the “pain” threshold, coined by UOB Kay
Hian, of consumers.
This basically means that latest hikes would likely push consumers to either switch to
vaping which has shown itself to save between 28% and 50% for the consumer before
the recent price hike (according to Hong Leong IB); illicit puffs which can be acquired
for less than RM3 a box with a negligible difference in quality; or even stop smoking
altogether.
As such, research houses are mixed on the matter of whether or not the recent price
hike, which saw compliance from both JTI and PMI, would be enough to offset the
aftermath of the hike.
There remains an even spread, with some research houses noting that the quantum
should hold BAT, but there remain those less optimistic, or perhaps more pragmatic,
who noted that the price hike, along with the weakening consumer sentiment as well as
the mess of cigarettes versus vaping at the current time, will pressure BAT’s margins
into dropping.
Earnings forecast:
StockStalk: BAT, and indeed the whole tobacco sector, has been on the receiving end
of blow after blow over the past year, leading to the point where any more hit would be
worrying indeed. Having suffered in terms of margins as well as share price, BAT is
faced with multiple headwinds, making it difficult to keep a cigarette lit.
First, there is the implementation of GST, which came with an anti-profiteering clause.
The clause, enforced by the Anti-Profiteering Act of 2011, states that businesses are not
allowed to hike their prices to a point where their margins increase, to prevent
irresponsible and unreasonable price hikes among items.
With this clause lasting until December 2016, it may be difficult for BAT to recover
margins, as they are only left with the option of hiking prices to meet their margins.
At the same time, consumer sentiment has weakened, due in part to the GST
implementation, the messy political environment, as well as the weakening ringgit. This
has led to consumers having less to spend with and having to be more picky on what
they spend on.
With the price hike now kicking cigarettes to between RM15.50 and RM17 for a box of
20 sticks, consumers may very well decide that it is a good time to cut down or kick the
habit altogether.
Furthermore, there remains the fact that there are more than just legitimate cigarettes
available to the market. Illicit puffs have always been a problem for the local tobacco Big
Three, due to the fact that they are available for less than RM3 for a box of 20, with a
negligible difference in quality.
While the Royal Malaysian Customs are doing what they can to curb illicit cigarettes, an
idiom of business stands true: if there is demand, there will be supply.
If that was not enough, there is a new competitor for the sector’s market share recently,
with vaping coming in as a disruptive innovation that is both less harmful, yet providing
more options than cigarettes. Other than the initial start-up cost, which can range
between RM300 and RM1000, vapers are looking at an expenditure of up to 50% less
than a one-pack-a-day smoker.
However, the issue with vaping stands in muddied waters, due to the mixed response
seen from the government regarding vaping. Despite a promise that vaping will not be
banned, vape stores have faced raids, with the Health Ministry seizing vape juice that
has nicotine content.
This has, in turn, stirred unrest among the vaping community of Malaysia, some of
which were smokers themselves.
With all of this standing against BAT, the advice would be that this particular stock is
too risky at this time. While investors are welcome to the stock, considering it is trading
close to its intra-year low, investors are warned of the headwinds faced by BAT as listed
above. While the stock has a high dividend yield, the current situation speaks against
investing in the company at this time.
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