Tobacco (NEUTRAL; NEW)
To Smoke or Not To Smoke?
- The tobacco sector is expected to continue experiencing decline in TIV albeit marginally. TIV could decline further if government imposes excise duty (ED) hike. Currently, illicit cigarettes are sitting on considerably high market share level of 36.1%.
- Illicit cigarettes decline in 2010 and 2011 due to regulation tightening and stronger enforcement, coupled with the absence of ED hike during Budget 2012.
- The sector has an inelastic demand. Moreover, the increases in cigarette prices are more than enough to offset the increase in ED. Coupled with continued enforcement; earnings are expected to be resilient and highly predictable.
- The sector is also affected by seasonal factors whereby 4Q traditionally record lower earnings from lower sales volume due to pre-stocking activities ahead of potential ED hike.
- The advantages of the sector are: (1) High dividend yield stocks; and (2) Countercyclical share price pattern.
- However, current share prices have fully reflected their respective fundamentals. Hence, we initiate coverage on the sector with a NEUTRAL rating:
- (1) British American Tobacco, BAT (HOLD; TP: RM49.50)
- (2) JT International, JTI (HOLD; TP: RM6.90)
Source: HLIB Reserach - 4 April 2012
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