Tobacco industry caught by surprise
 
PETALING JAYA: The Government has increased the excise duty on tobacco by 1 sen, or 5.6% per stick, effective last Thursday, though there is no official announcement by the Finance Ministry or Customs Department.

The 1 sen per stick duty hike will raise the excise duty per stick to 19 sen. The move caught the industry by surprise as there had been no indication of a tax increase before Budget 2010, which is to be tabled on Oct 23.

Analysts are now expecting cigarette prices to be raised by 1 sen to 2 sen per stick sometime this week. Most industry players are still expecting an increase in taxes for tobacco come Oct 23 as the Government seeks to reduce its deficit.

The three main tobacco players in Malaysia are British American Tobacco Malaysia Bhd (BAT), JT International Bhd (JTI) and Philip Morris (M) Sdn Bhd.

BAT commands some 70% of the legal cigarette market. When contacted, JTI declined comment. As at press time, its cigarette prices have yet to be raised. BAT, however said it would be raising cigarette prices by 20 sen to 30 sen, effective yesterday.

“Although this is the third time the Government has raised tobacco excise duty outside the budget period, the timing caught us by surprise as we had expected an upward revision to be made only during the Budget 2010 announcement,” said CIMB Research head Terence Wong.

Wong is bracing for another tobacco duty hike this month. Thus, he expects a further 1 sen to 2 sen per stick increase in the upcoming budget, which will bring total excise duty hike for the year to 2 sen to 3 sen per stick.

ECM Libra too felt that a duty hike at this juncture, although unconfirmed, was rather surprising as the tabling of Budget 2010 was only weeks away.

“The small hike suggests that the Government will likely impose another duty hike when Budget 2010 is announced, as it is well known that the Government needs tax revenues to shore up a widening deficit as a result of the fiscal stimulus packages,” it said.

The research house too opined that the Government may impose another duty hike of between 1 sen and 3 sen per stick, thus bringing total duty hike to between 2 sen and 4 sen per stick. In the past few years, the Government has typically raised the excise duty by 3 sen per stick each round.

In the meantime, tobacco players are expected to respond by adjusting their pricing to protect profits. Tobacco players have historically tempered the negative impact of lower industry demand on profits via higher selling prices.

They have traditionally raised prices higher than the quantum of the duty hike to give room for promotional activities needed to cushion the volume drop.

ECM Libra does not expect earnings of tobacco companies to be adversely impacted, unless the quantum of duty hike is beyond its expectations.

Wong forecast a 10% contraction in total industry volume (TIV) from 15.4 billion sticks in 2008 to about 13.8 billion sticks this year. TIV in the first half of 2009 shrank by close to 12% compared with a year ago.

The tobacco sector remained a defensive play and was unlikely to track the market’s upside. “Strong cashflows and attractive yields should provide downside support for these stocks,” Wong said.