BAT (4162) - British American Tobacco - U-turn in pricing again
Target RM58.00 (Stock Rating: REDUCE)
Our channel checks reveal that BAT has today reduced its selling prices by RM0.20/pack to remain competitive against PMI, which has decided not to raise its selling prices by as much as BAT, and JTI, which has maintained its selling prices. While BAT’s price reduction could prevent it from losing market share in the short-term, we do not discount the possibility of PMI undercutting BAT. We lower our FY15-17 EPS forecast to take into account the lower selling prices and market share loss due to price disparity. We maintain Reduce on BAT with a lower DDM-based target price. For dividend yield plays, we recommend brewer stocks.
What Happened
Our channel checks today reveal that BAT has reduced its selling prices by RM0.20/pack to RM13.80 for premium cigarettes, and RM12.30 for VFM cigarettes. On 1 April 2014, the company raised its selling prices by RM0.50/pack to RM14/pack for premium and RM12.50/pack for VFM. While PMI followed BAT in raising its selling prices (premium, RM13.90/pack; VFM, RM12.30/pack), the quantum of the increase was lower than BAT’s. JTI decided to keep its selling prices at RM13.50 for premium and RM12 for VFM. To maintain its competitiveness, BAT has decided to reduce its cigarette prices.
What We Think
BAT’s response to reduce prices did not come as a complete surprise to us as the company has made selling price U-turns before, such as in Sep 2014 when it was caught off-guard by JTI not raising its prices. This move is also a rational one for BAT as it would lose market share if it were to maintain the higher selling prices. For instance, in Sep 2014, BAT’s sales volume fell by 10% yoy as it lost market share due to the disparity between its selling prices and those of its competitors in the two weeks before it reversed its decision. While BAT’s RM0.20/pack price reduction would help to reduce market share loss in the short-term, we do not discount the possibility of PMI reducing prices as a countermove. If this happens, BAT may need to embark on another round of price cuts to maintain its market share. This is the second time BAT’s competitors have decided not to follow its lead, which suggests to us that it may be losing its cigarette price leadership position in Malaysia.
What You Should Do
Reduce exposure. We maintain our view that regulatory and competition risks will be a constant battle for BAT. In addition, consumption is expected to be weak due to slower consumer spending. To make matters worse, the company may have also lost its price leadership position.
Source: CIMB Daybreak - 14 April 2015
Target RM58.00 (Stock Rating: REDUCE)
Our channel checks reveal that BAT has today reduced its selling prices by RM0.20/pack to remain competitive against PMI, which has decided not to raise its selling prices by as much as BAT, and JTI, which has maintained its selling prices. While BAT’s price reduction could prevent it from losing market share in the short-term, we do not discount the possibility of PMI undercutting BAT. We lower our FY15-17 EPS forecast to take into account the lower selling prices and market share loss due to price disparity. We maintain Reduce on BAT with a lower DDM-based target price. For dividend yield plays, we recommend brewer stocks.
What Happened
Our channel checks today reveal that BAT has reduced its selling prices by RM0.20/pack to RM13.80 for premium cigarettes, and RM12.30 for VFM cigarettes. On 1 April 2014, the company raised its selling prices by RM0.50/pack to RM14/pack for premium and RM12.50/pack for VFM. While PMI followed BAT in raising its selling prices (premium, RM13.90/pack; VFM, RM12.30/pack), the quantum of the increase was lower than BAT’s. JTI decided to keep its selling prices at RM13.50 for premium and RM12 for VFM. To maintain its competitiveness, BAT has decided to reduce its cigarette prices.
What We Think
BAT’s response to reduce prices did not come as a complete surprise to us as the company has made selling price U-turns before, such as in Sep 2014 when it was caught off-guard by JTI not raising its prices. This move is also a rational one for BAT as it would lose market share if it were to maintain the higher selling prices. For instance, in Sep 2014, BAT’s sales volume fell by 10% yoy as it lost market share due to the disparity between its selling prices and those of its competitors in the two weeks before it reversed its decision. While BAT’s RM0.20/pack price reduction would help to reduce market share loss in the short-term, we do not discount the possibility of PMI reducing prices as a countermove. If this happens, BAT may need to embark on another round of price cuts to maintain its market share. This is the second time BAT’s competitors have decided not to follow its lead, which suggests to us that it may be losing its cigarette price leadership position in Malaysia.
What You Should Do
Reduce exposure. We maintain our view that regulatory and competition risks will be a constant battle for BAT. In addition, consumption is expected to be weak due to slower consumer spending. To make matters worse, the company may have also lost its price leadership position.
Source: CIMB Daybreak - 14 April 2015
