KUALA LUMPUR: RAM Ratings said the recent spike in excise duty on cigarettes has no impact on the respective AAA and AAA/P1 ratings of British American Tobacco (Malaysia) Berhad's (BAT Malaysia or the Group) RM700 million Medium-Term Notes Programme (2007/2020) and RM100 million Commercial Papers/Medium-Term Notes Programme (2007/2014).
Below is the statement issued by RAM Rating Services Bhd on Thursday, Oct 7:
BAT Malaysia is involved in the manufacturing, marketing and distribution of cigarettes. Its portfolio encompasses global drive brands such as Dunhill, Pall Mall and Kent, as well as other well-established international names like Peter Stuyvesant, Rothmans and Benson & Hedges.
The Government imposed a 16% increase in the excise duty on cigarettes on 1 October 2010. Following this, the excise duty has gone up 3 sen, i.e. from 19 sen to 22 sen per stick. In response, BAT Malaysia and the other tobacco companies have elevated the retail prices of premium and value-for-money (VFM) cigarettes, by 70 sen for a 20-stick pack. This translates into a current price of RM10.00 for a 20-stick pack of premium cigarettes and RM8.50 per 20-stick pack of VFMs.
The latest steep excise-duty hike is anticipated to dampen industry volumes by 5%'10% year-on-year as we anticipate the further proliferation of illicit cigarettes. Notably, industry sales volumes have been declining in the last 6 years amid several increases in excise duty. Meanwhile, the incidences of illicit cigarettes rose to a staggering 37.5% of total consumption in 2009 (2005: 16%).
As BAT Malaysia's product mix is skewed towards premium brands, down-trading activities arising from the steep price increase may also benefit competitors that have larger exposures to the VFM segment, or even producers of extremely low-priced cigarettes.
We note that the Group re-launched Peter Stuyvesant under the VFM segment in June 2010, in a bid to retain consumers who have traded down from the premium segment; there are indications that the re-launch has already elicited encouraging response. Nonetheless, more time is required to evaluate its effectiveness in terms of market penetration.
Despite the latest 70-sen rise in selling prices that is more than sufficient to cover the excise duty hike, BAT Malaysia's margin on operating profit before depreciation, interest and tax (OPBDIT) is expected to be squeezed by heftier production cost on a 'per unit' basis, brought about by the anticipated steep decline in sales volume.
Compounded by the impact from the withdrawal of 14-stick pack (which yields higher margins) since June 2010, the Group's OPBDIT margin is expected to retrace to around 25% in FY Dec 2010 and 23% in FY Dec 2011 (FY Dec 2009: 28.3%).
'Nonetheless, we still expect BAT Malaysia's credit profile to be firmly supported by its entrenched market position, strong brand equity and superior financial profile,' notes Kevin Lim, RAM Ratings' Head of Consumer & Industrial Ratings.
'The Group remained the market leader with an overall 60.3%-share in 2009. In the meantime, BAT Malaysia's cashflow-protection metrics are expected to stay superior, with a corresponding funds from operations debt coverage ratio of about 1 time,' he adds.
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Below is the statement issued by RAM Rating Services Bhd on Thursday, Oct 7:
BAT Malaysia is involved in the manufacturing, marketing and distribution of cigarettes. Its portfolio encompasses global drive brands such as Dunhill, Pall Mall and Kent, as well as other well-established international names like Peter Stuyvesant, Rothmans and Benson & Hedges.
The Government imposed a 16% increase in the excise duty on cigarettes on 1 October 2010. Following this, the excise duty has gone up 3 sen, i.e. from 19 sen to 22 sen per stick. In response, BAT Malaysia and the other tobacco companies have elevated the retail prices of premium and value-for-money (VFM) cigarettes, by 70 sen for a 20-stick pack. This translates into a current price of RM10.00 for a 20-stick pack of premium cigarettes and RM8.50 per 20-stick pack of VFMs.
The latest steep excise-duty hike is anticipated to dampen industry volumes by 5%'10% year-on-year as we anticipate the further proliferation of illicit cigarettes. Notably, industry sales volumes have been declining in the last 6 years amid several increases in excise duty. Meanwhile, the incidences of illicit cigarettes rose to a staggering 37.5% of total consumption in 2009 (2005: 16%).
As BAT Malaysia's product mix is skewed towards premium brands, down-trading activities arising from the steep price increase may also benefit competitors that have larger exposures to the VFM segment, or even producers of extremely low-priced cigarettes.
We note that the Group re-launched Peter Stuyvesant under the VFM segment in June 2010, in a bid to retain consumers who have traded down from the premium segment; there are indications that the re-launch has already elicited encouraging response. Nonetheless, more time is required to evaluate its effectiveness in terms of market penetration.
Despite the latest 70-sen rise in selling prices that is more than sufficient to cover the excise duty hike, BAT Malaysia's margin on operating profit before depreciation, interest and tax (OPBDIT) is expected to be squeezed by heftier production cost on a 'per unit' basis, brought about by the anticipated steep decline in sales volume.
Compounded by the impact from the withdrawal of 14-stick pack (which yields higher margins) since June 2010, the Group's OPBDIT margin is expected to retrace to around 25% in FY Dec 2010 and 23% in FY Dec 2011 (FY Dec 2009: 28.3%).
'Nonetheless, we still expect BAT Malaysia's credit profile to be firmly supported by its entrenched market position, strong brand equity and superior financial profile,' notes Kevin Lim, RAM Ratings' Head of Consumer & Industrial Ratings.
'The Group remained the market leader with an overall 60.3%-share in 2009. In the meantime, BAT Malaysia's cashflow-protection metrics are expected to stay superior, with a corresponding funds from operations debt coverage ratio of about 1 time,' he adds.
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