JTI, PMI expected to raise cigarette prices too

PETALING JAYA: Cigarette manufacturers JT International Bhd (JTI) and Philip Morris International (PMI) are expected to follow British American Tobacco (Malaysia) Bhd’s (BAT) lead in raising the prices of their cigarettes in the next few days.

Yesterday, BAT raised the prices of all its cigarette brands by between 22% and 26% in reaction to the more than 40% increase in cigarette excise duty.

Despite no similar announcements by JTI and PMI, analysts believe that that the two players will follow suit.

“From our channel checks, we gather that JTI will be raising prices in two days’ time but unsure of PMI’s move, though they are both legally bounded to raise prices by a minimum of RM2.60,” AmResearch analyst Cheryl Tan said in a report yesterday.

It should be noted that in September 2014, only JTI followed BAT in increasing the prices of their cigarettes. However, the country’s top two tobacco players made an about-turn barely a month after and reduced prices, citing the challenging operating environment due to mounting inflationary cost pressure.

However, the “unprecedented” massive increase in cigarette excise of more than 40% by the government effective yesterday could force PMI to increase the prices of its products this time around.

BAT did not mention the exact amount of the excise increase, but Tan assumed the hike to be 12 sen per stick, or a 43% jump. “This would bring the total excise duty on tobacco to 40 sen per stick,” she said.

Analysts like Tan, while not entirely surprised by the timing of the increase, were taken aback by the quantum of the excise and pack price hikes.

The quantum of the increase in prices saw premium cigarette brands raised by 23.2% (RM13.80 to RM17.00) while value-for-money (VFM) brands will have a larger price hike of 26.1% (RM12.30 to RM15.50).

Previous excise duty hikes had averaged 12%, with the last largest increase at 36% reported in 2005, while cigarette pack price increases had averaged at 8% since 2000.

Meanwhile, Hong Leong IB Research (HLIB Research) has downgraded BAT to a “sell” with a lower target price of RM53.30 after it raised raised prices by up to RM3.20 per pack of 20 sticks for its premium and VFM brands.

“We believe a sell rating is warranted in view of the heightened regulatory risk and unprecedented magnitude of excise hike, coupled with an already declining industry volume and longer term risk from rapid growth of vape users,” HLIB Research analyst Low Yee Huap said.

MIDF Research, meanwhile, expects the price increase to impact BAT’s earnings for 2015 due to the possibility of a volume drop in November and December.

It noted that, historically, volume would most probably rebound after two or three months of decline.

“However, in this current environment, with the growing presence of vapes (electronic cigarettes) and the still widely accessible illicit cigarettes, we believe that it would be an uphill challenge for BAT’s volume to rebound to its current levels.

“Although we believe that the demand for cigarettes will remain in the uptrend for the longer term, it would be an extremely tough challenge for BAT to maintain its sales volume in the shorter term.

“We also expect this huge price hike to further support the alternatives, such as the illicit cigarette market, as smokers would be hard pressed in view of the increasing cost of living,” it said.

It added that in view of the massive price hike, there is a strong likelihood that some smokers will either switch to a cheaper brand or to illicit cigarettes, or shift to vaping as it is now arguably cheaper than smoking conventional cigarettes.

“As such, we are revising the earnings for FY15 and FY16 downwards by 4.0% and 5.1% to factor in the loss in volume due to the price hike,” MIDF Research said, adding that it has downgraded its dividend forecast for FY15 and FY16 to RM3.12 and RM3.17.
Shares of BAT fell by RM1.48 or 2.38% to RM60.82 yesterday with 730,200 units traded.