BAT (4162) - British American Tobacco - Prices reduced to pre-GST levels
Target RM56.20 (Stock Rating: REDUCE)
On 17 April 2015, BAT announced that it has reduced its selling prices to pre-GST levels in order to remain competitive against JTI, which kept its selling prices unchanged after GST was implemented. This is BAT’s second price reduction in less than a week. The recent price competition in the industry shows that price hikes may no longer be effective to raise profits. We cut our FY15-17 EPS forecasts by 2-3% to factor in lower selling prices and higher sales volume from lower loss of market share. Maintain Reduce on BAT, with a lower DDM-based target price. The second price cut and competitive environment are key de-rating catalysts. We prefer the brewers for dividend yield plays.
What Happened
BAT has reduced its selling prices by RM0.30/pack to pre-GST levels, effective 17 April 2015. BAT’s premium cigarettes are now being sold for RM13.50/pack, while its value-for-money (VFM) cigarettes are being sold for RM12/pack. This is the second time that BAT has reduced prices in less than one week. On 1 April 2015, BAT raised its prices by RM0.50/pack due to the implementation of GST. However, it reduced its selling prices by RM0.20/pack after two weeks to remain competitive against PMI, which decided not to raise selling prices as much as BAT, and JTI, which kept its selling prices at pre-GST levels.
What We Think
BAT’s decision to reduce prices again was within our expectations, as it would lose market share if it maintained the higher selling prices. Steeper-than-expected sales volume decline may have prompted BAT’s second round of price cuts. Reverting to pre-GST prices means that BAT is absorbing the GST, which will weigh on margins. Following its first price reduction a few days ago, BAT’s premium selling price of RM13.80/pack was RM0.10 below PMI’s but higher than JTI’s RM13.50/pack. BAT’s VFM selling price of RM12.30/pack was also higher than JTI’s RM12/pack. Our checks today revealed that PMI is still maintaining its premium and VFM selling prices at RM13.90/pack and RM12.30/pack, respectively. We do not dismiss the possibility of PMI reducing prices to protect its market share.
What You Should Do
Reduce exposure. Regulatory risks will be a constant battle for BAT, while consumption is expected to be weak due to slower consumer spending in 2015. In our view, the recent price competition demonstrates that it will be difficult for BAT to raise prices to counter the persistent drop in volumes going forward.
Source: CIMB Daybreak - 20 April 2015
Target RM56.20 (Stock Rating: REDUCE)
On 17 April 2015, BAT announced that it has reduced its selling prices to pre-GST levels in order to remain competitive against JTI, which kept its selling prices unchanged after GST was implemented. This is BAT’s second price reduction in less than a week. The recent price competition in the industry shows that price hikes may no longer be effective to raise profits. We cut our FY15-17 EPS forecasts by 2-3% to factor in lower selling prices and higher sales volume from lower loss of market share. Maintain Reduce on BAT, with a lower DDM-based target price. The second price cut and competitive environment are key de-rating catalysts. We prefer the brewers for dividend yield plays.
What Happened
BAT has reduced its selling prices by RM0.30/pack to pre-GST levels, effective 17 April 2015. BAT’s premium cigarettes are now being sold for RM13.50/pack, while its value-for-money (VFM) cigarettes are being sold for RM12/pack. This is the second time that BAT has reduced prices in less than one week. On 1 April 2015, BAT raised its prices by RM0.50/pack due to the implementation of GST. However, it reduced its selling prices by RM0.20/pack after two weeks to remain competitive against PMI, which decided not to raise selling prices as much as BAT, and JTI, which kept its selling prices at pre-GST levels.
What We Think
BAT’s decision to reduce prices again was within our expectations, as it would lose market share if it maintained the higher selling prices. Steeper-than-expected sales volume decline may have prompted BAT’s second round of price cuts. Reverting to pre-GST prices means that BAT is absorbing the GST, which will weigh on margins. Following its first price reduction a few days ago, BAT’s premium selling price of RM13.80/pack was RM0.10 below PMI’s but higher than JTI’s RM13.50/pack. BAT’s VFM selling price of RM12.30/pack was also higher than JTI’s RM12/pack. Our checks today revealed that PMI is still maintaining its premium and VFM selling prices at RM13.90/pack and RM12.30/pack, respectively. We do not dismiss the possibility of PMI reducing prices to protect its market share.
What You Should Do
Reduce exposure. Regulatory risks will be a constant battle for BAT, while consumption is expected to be weak due to slower consumer spending in 2015. In our view, the recent price competition demonstrates that it will be difficult for BAT to raise prices to counter the persistent drop in volumes going forward.
Source: CIMB Daybreak - 20 April 2015
