Pricier cigarettes may lead to further down-trading BAT’s flagship brands, Dunhill and Kent which will now retail for RM17 per pack, while its value-for-money brands will now sell for RM15.50 per pack. — Reuters photo
KUCHING: Analysts are less optimistic on cigarette maker British American Tobacco Bhd’s (BAT) outlook following the announcement of a price hike for its brand cigarettes.
On Tuesday, the government increased the excise duties on cigarettes by 12 sen per stick to 40 sen per stick. Consequently, BAT increased its retail prices by RM3.20 per pack across the board effective yesterday.
This translates into an increase of 16 sen per stick. Its new premium product, Shuang Xi brand, will be priced at RM18 per pack. Overall, this brings BAT’s year to date increase in cigarette prices to RM3.50 per pack, or 17.5 sen per stick.
Analysts at MIDF Amanah Investment Bank Bhd (MIDF Research) expect earnings for BAT to be impacted in the midst of a challenging outlook for cigarette players in general.
“We expect the price hike to impact its earnings for 2015 due to the possibility of a volume drop in November and December months,” it detailled in a note yesterday. “Historically, the volume would most probably rebound after two or three months of experiencing a decline.
“However, in this current environment, with the growing presence of vapes (electronic cigarettes) and the still widely accessible illicit cigarettes, we believe that it would be an uphill challenge for BAT’s volume to rebound to its current levels.”
Although MIDF Research believe that the demand for cigarettes will remain in the uptrend for the longer term, it said it would be “an extremely tough challenge for BAT to maintain its sales volume in the shorter term.
Meanwhile, Affin Hwang Investment Bank Bhd (AffinHwang Research) said pricier cigarette sticks may lead to further down-trading BAT’s flagship brands, Dunhill and Kent which will now retail for RM17 per pack, while its value-for-money (VFM) brands will now sell for RM15.50 per pack.
“Although margins may be maintained, we believe that sales volume may suffer as a result and the risk is that this could develop into a larger shift to illicit cigarettes and potentially e-cigarettes, especially when prices go way past affordable levels,” it said.
“Despite the government’s effort in clamping down the illegal cigarette market, the market share for illicit cigarettes still stands at about one-third of the tobacco industry.”
“We also expect this huge price hike to further support the alternatives, such as illicit cigarette market, as smokers would be hard-pressed in view of the increasing cost of living.
“In view of the massive price hike in cigarettes, there is a strong likelihood for some smokers to either switch to a cheaper brand, illicit cigarettes or shift to vapes as it is now arguably cheaper than smoking conventional cigarettes.”
As such, the research house revised the earnings for FY15 and FY16 downwards by four per cent and 5.1 per cent to factor in the loss in volume due to the price hike.”