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Tobacco firms see improved earnings from import duty cut
Hasni Mohd Nasir
The Star (my), 2002-01-28
TOBACCO companies will see improved earnings with the recent 20% import duty cut on tobacco leaves, but any savings will not likely be passed on to consumers.
The import duty reduction of RM10 per kg takes effect on Jan 1, 2002, and believed to be an incentive for the tobacco companies in their effort to help local tobacco growers' replanting programme.
"The latest cut in import duties came as a positive surprise to us,'' said OCBC Research in its write-up.
The tobacco industry was hit by two consecutive years of tax increase since October 2000. The government raised sales tax for cigarettes by 10% and it increased the excise duties by 2% in the Budget 2002 tabled in October last year.
The two tax increases have resulted in price hikes of about 16% and 20% for cigarettes. In the last two years, the price of premium brand cigarettes had increased by 70 sen per pack to RM5 and the price for value brands had risen by 60 sen to RM3.60.
The impact of these price hikes has hurt sales due to rampant smuggling activities. Total duty paid by the industry is estimated at 18 billion sticks annually, still below the pre-1998 level of 21 billion sticks.
CIMBS Research Group analyst Chen Wee Lee said there would be slight improvement in margins with the duty cut, with British American Tobacco (BAT) expected to see an increase of 20 sen and JT International (JTI) an increase of 4 sen in their earnings per share (EPS).
He said the government could afford to be generous with the cut as the excise and import duties of tobacco leaves still stood at a comfortable RM88 per kg from RM98 per kg before the cut.
OCBC Research in its report said local tobacco companies had traditionally imported between 25% and 30% of their leaves requirement, but the crop failure in local planted areas had raised the imported leaves content to between 30% and 40%.
At current estimated annual imported volume of 5.7 million kg, the 20% cut in import duties is estimated to lower the cost of cigarette manufacturing by between 6 sen and 7 sen per pack.
One kg of local leaves costs RM15 per kg, and imported leaves between RM3.80 and RM19 per kg.
Inclusive of the excise duty and import duty, the cost for imported leaves can be anything between RM92 and RM107 per kg.
OCBC Research said as government taxes made up between 48% and 52% of tobacco companies' total cost, the tax cut would lower costs and boost profits.
It has projected a full year impact of the tax cut to raise BAT's EPS by 10.8 sen or 5.1% and JTI's EPS by 2.6 sen or 11.4%.
It said BAT's revised net asset value (RNAV) was thus raised by 4.8% to RM45.70 and JTI by 17.2% to RM3.75.
OCBC has maintained an outperform recommendation on BAT and underperform for JTI due to its weaker market position.
At current price, BAT is trading at a 24.5% discount to RNAV. With a 69% lion share in the local cigarette market and its strong brand presence in the premium segment, BAT remains a top pick for the sector.
"The stock is at cheaper valuations compared to JTI and it offers higher dividend yields of between 6% and 7% compared to JTI's of between 4% and 6%,'' the OCBC report said.
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