Tobacco: Downgrade to Underweight - Going Plain, Growing Pain

• Underweight Tobacco. Regulatory risk on tobacco sector rose when the plain cigarette-packaging rule took a quantum leap in Australia towards actual implementation. The industry also faces a greater threat from the emerging 'mutated' illicit cigarettes despite a recovery in industry volumes in 1H12. Aside from the rising risk, the sector is losing its appeal on lofty valuations and dwindling dividend yields. Thus, we recommend an Underweight on the tobacco sector. BAT is downgraded to a SELL at an unchanged DCF-based TP of MYR55.00 while JTI remains a HOLD with an unchanged DCF-based TP of MYR6.70.

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Source: Maybank Research - 13 Sept 2012