MAYBANK Investment Bank (Maybank IB) is staying neutral on the tobacco sector, ahead of the government’s announcement of the budget for the coming year.

The research house is expecting an excise duty hike of at least 11% or two sen to 20 sen per stick.

“This is partly because consumption has been resilient and mainly because government collections from excise duties grew 18.8% in 2008.

“It could be higher if the government chooses to simplify the masses of duties and taxes on cigarettes in view of the upcoming Asean Free Trade Agreement (Afta) statutes that will result in lower import duties,” stated Maybank IB.

Of the two listed tobacco players, it expects JT International Bhd’s (JTI) prospects to be largely unencumbered by the impending changes in the sector.
 
“On a 12-month moving average basis, JTI sales have stayed largely resilient,” said Maybank IB, adding that JTI’s resilience was due to the performance of its Winston and Mild Seven brands.

“Mild Seven recorded its eighth consecutive quarter of advance on a 12-month moving average basis up to 2QCY09. This made up for the continued decline of JTI’s leading premium brand, Salem... it appears that Mild Seven’s emergence has ensured that margins overall for JTI are no longer as pressured,” it added.

Maybank IB has a buy on JTI with a fair value of RM5.30, and a hold on British American Tobacco (M) Bhd (BAT) with a fair value RM44.75.  

“BAT might fare less well but should still offer decent dividend yields, of 8% to 9% gross dividend yields over 2009 to 2011,” it said.

Maybank IB noted that sales of tobacco were on the decline according to the players and the Confederation of Malaysian Tobacco Manufacturers. Industry sales volumes for 2Q09 fell by 13.8% year-on-year, its sharpest decline since 3Q06.

However, it pointed out that while sales were on the decline, total consumption of tobacco had not.

“The difference between the Big 3 (JTI, BAT and unlisted Philip Morris) tobacco sales and total consumption is made up of two components.

“First, sub-value local manufacturers that sell their products at below the price of the ‘Big 3’ value brands are contributing an increasing proportion to total consumption. Second, illicit sales including sales of smuggled cigarettes, counterfeit cigarettes and duty-not-paid cigarettes now make up to as much as 33% of total consumption,” it added.

At yesterday’s close, both JTI and BAT were unchanged at RM4.74 and RM45.56 respectively.

This article appeared in The Edge Financial Daily, September 9, 2009.