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Categories
| Hit by surprise tobacco hike |
| Features | |||
| Written by Nadia S Hassan | |||
| Monday, 05 October 2009 00:00 | |||
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“As of Friday, there has been no written directive from the government about the increase in excise tax,” says an industry source. In fact, it is learnt that the Big Three tobacco players — British American Tobacco (M) Bhd, JT International Bhd, Philip Morris (M) Bhd — along with the other smaller players, were only informed last Thursday when it was time to settle the payment of their excise duties. While the timing of the increase is unusual enough, what is more puzzling is the lack of official newsflow. A quick check of both the MOF and Malaysian Customs websites reveals no announcement of a tobacco hike. Tobacco excise hikes outside the budget are nothing new. It had happened once before in July 2007 when tobacco players were blindsided by a hefty 25% excise duty hike that sent them scrambling to adjust their prices. The government had subsequently warned industry players that it would not be the last time it would implement surprise increases on tobacco. “However, in this instance, the hike will result in even more of a jolt. In addition to a lack of an official statement, why would the government announce an increase barely a month before the upcoming budget? Most in the industry were already expecting a hike come Oct 23,” says an industry observer. When the unexpected hike in 2007 took place, the reasoning was that the government had done it to discourage hoarding activities. Typically, merchants will stock up in the weeks leading to the budget. Speculation in the market is the government had either taken out or broken up its proposed excise tax increase for tobacco from the upcoming budget in order to give it a nicer polish. However, most industry players are still expecting an increase in taxes for tobacco come Oct 23 as the government seeks to reduce its deficit. “We are fully expecting to be hit by a double whammy this year,” says a tobacco player. With this increase, excise duty on cigarettes now stands at 19 sen per stick. What this means is that the minimum increase in price that consumers can expect to see for a pack of 20 is 20 sen. Most are expecting the increase to be between 30 and 40 sen. The Big Three have yet to announce exactly when they will adjust their prices to reflect the new excise tax, but logic suggests that it will take place this week. Even before the news broke, most research houses had been neutral on the tobacco sector’s prospects, citing an increasingly difficult operating climate as the government steps up its efforts to stamp out smoking among the younger people. “Despite its relative resilience, we believe the tobacco sector is still an unattractive investment due to other challenges ahead. Recall that over the last 12 months, there have been four directives implemented by the Ministry of Health. “These were namely price parity for all packs of cigarettes, price discounting of not more than 5% for no more than a month, price per stick of cigarette for packs less than 20 to be at least 5% more than price per stick for a pack of 20s and the implementation of pictorial health warnings,” says RHB in its Sept 30 report. Even more damaging to the Big Three was the increased proliferation of illicit cigarettes, which this year in particular showed significant growth as more people chose to down-trade to cheaper options. According to the latest figures from Malaysian Customs, illicit cigarettes now comprise 36.8% of total industry consumption. For years, the tobacco players have been lobbying the government to implement moderate increases in tobacco taxes, with the argument that sharp increases encourage the growth of illicit trade in cigarettes. The most recent development is unlikely to quell their fears as they hold their breath until the budget is tabled. RHB and AmResearch both have a “neutral” stance on the tobacco sector according to pre-budget reports issued before the excise hike. RHB expects the government to impose another duty hike on cigarettes of between 10% and 12% in the upcoming budget, which would result in a price adjustment of between 55 and 65 sen. “This would enhance the government’s revenue from cigarette taxes by about RM70 million to RM140 million per annum,” says RHB. RHB has an “underperform” recommendation on market leader BAT with a fair value of RM43.70. According to RHB, a 10% to 12% hike in excise duties would decrease BAT’s earnings for FY2010 by between 1.3% and 2%. AmResearch prefers JTI for exposure to the tobacco sector for its better earnings resilience due to its portfolio mix of premium and value-for-money labels. It has a “buy” on JTI, with a fair value of RM5.30 and is maintaining its estimates at this juncture. This article appeared in The Edge Malaysia, Issue 775, Oct 5-11, 2009.
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