By Xavier Kong
British American Tobacco (Malaysia) Bhd’s share price recently dipped to a three-year low, a reaction to cigarette price hikes. Although it has recovered so far, would BAT retain its attractiveness as a sin stock, or could it fizzle out due to depressed volume and margins?
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.
Already faced with compressed margins due to the the implementation of the goods and services tax (GST) last April which came with its own an anti-profiteering clause, almost continuous excise duty hikes since 2004 (excluding 2011 and 2012), as well as the recent popularity of the industry-disruptive vapes, 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 its prices, fellow tobacco companies Japan Tobacco International (JTI) and Philip Morris International (PMI) also hiked their prices by RM3.20 across their brand stables.
Over the course of the week between Dec 3, 2015 to Dec 10, 2015, BAT’s share price plunged RM5.50 from RM58.60 to RM53.10. However, the stock saw recovery to RM57 on Dec 11, before dipping to close at RM55.40 on Dec 17.
BAT has refused to comment on this, but this was attributed by many analysts to a loss in investor sentiment due to the quantum of BAT’s price hikes for its brands, which stand as follows: Shuang Xi was hiked to RM18 from a previous RM15, Lucky Strike to RM17.50 from RM14.30, Benson & Hedges, Kent, and Dunhill to RM17 from RM13.80, Peter Stuyvesant and Pall Mall to RM15.50 from RM12.30.
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 (7.51%), followed by Aberdeen Asset Management Plc (6.49%).
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 is one of the major shareholders Malaysian Resources Corp Bhd (MRCB) that deals in construction, property investment development. He is also group managing director of MRCB.
On the board as well is Oh Chong Peng as 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 independent non-executive director. She also serves as director of Degem Bhd, Scomi Engineering Bhd, Shell Refinery Co (Federation of Malaya) Bhd and Berjaya Food Bhd.
Share performance: As shown in the graph, BAT is surely a case of how far the mighty have fallen.
From an intra-year high of RM70.76 on Feb 12, 2015, BAT fell to an intra-year low of RM53.10, with the downward trend between mid-April to mid-June due to the implementation of GST. The subsequent rises and falls followed the group’s attempts at balancing pricing and margins for its brands.
What analysts think: Analysts have noted that their recommendations and earnings forecasts are currently under review following the movement in BAT’s share price.
Fong Kah Yan, an analyst from UOB Kay Hian, is of the opinion that the dip in share price is likely the response to the group’s price hike, which Clini had said it was due to an off-Budget excise duty hike of more than 40%.
“While the previous price hike had managed to compensate for the volume loss of the price hike, this particular price hike might be seen as too much for consumers, which would directly impact the total volume of the group,” said Fong, adding that the the latest price hike could see BAT facing a volume loss of between 10% and 15%.
“Honestly, it would not surprise me if volume loss went as far as 20%,” Fong added.
However, Fong also noted that BAT currently has a rather attractive yield, which would have prompted the rally to RM57, before the share price normalised to RM55.40.
“Post-rally, BAT is looking at a yield of between 4% to 5%,” noted Fong.
Another analyst, who did not want to be named, commented on how the market was bearish on the stock, due to rising costs, which lead investors to be less confident on whether or not the group will be able to sustain profits.
“Though BAT has raised its prices, the market is not confident on whether the extra profits can compensate for the drop in volume from the price hike. It all depends oh how BAT does in its next quarter,” said the analyst, adding that the dividend also depends on how well BAT performs.
Earnings forecast:
StockStalk: BAT remains a sin stock. One thing that can usually be attributed to sin stocks is that they tend to survive, and maybe even thrive through the bad times as people seek out the simple pleasures of smokes and drinks to destress, or try their hand at trying to win it big. Consumers tend to reach out for the small comforts available to them when times are bad.
However, with the quantum of the increase in BAT’s prices across its brands, consumers may be forced to make a choice between forking out up to RM18 per packet of 20, or switching to vaping, of which BAT has no market share in Malaysia.
Of course, there also remains the alternative of illicit puffs, if consumers are able to find a vendor. Considering an illicit pack of 20 costs about RM4, consumers may move to the more economical choice as the cost of living continues to rise.
With the quantum of the price hike, the anti-profiteering clause built into GST during implementation, as well as mounting pressure from high excise duties, the emergence of vaping, as well as the competition of illicit puffs, KINIBIZ is unsure of how BAT intends to maintain its margins.
All said and done, BAT has so far proven its resilience. The stock has rallied to RM55.40 from its low of RM53.10. However, note that BAT had started this from a position around RM62.
This may be a time for investors looking to buy into BAT to get on the train, should they still wish to, as dividend yields are now attractive between 4% and 5%. However, the question of just how long BAT can continue to survive in the face of pressures both inside and out needs to be answered. Investors are advised to consider this question before making their decision.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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