BAT may see better margins after GST zerorisation

KUALA LUMPUR: British American Tobacco (M) Bhd has said that while a "zero-ing" of GST could translate into lower prices, the tobacco industry is restricted by the Ministry of Health regulations against decreasing prices without its formal evaluation and approval.

Kenanga Research noted in its Tuesday report that it assumes the group may benefit from better margins as there may be no immediate price adjustments after GST is zerorised on June 1.

The research house said BAT's first quarter net earnings of RM96.2mil and interim dividend of 33 sen were below expectations due to the growth in illicit products and the absence of exports sales from 3M17.

"The miss was owing to the continuing growth in illegal trades, which narrowed legal sales across the market," it said.

Kenanga Research added that despite the introduction of more affordable offerings on the market, the proportion of illicit trade continues to grow and saw a new high of 63% in the quarter. 

It downgraded British American Tobacco (M) to market perform with a lower target price of RM31.70.

"Post-results, we trim our FY18E/FY19E earnings by 6.3%/2.2% for more conservative sales assumptions.

"However, we improve our margins assuming prices for the remainder of the year are constant, but without GST contributions. Our dividend assumptions are lowered to 167.0 sen/ 185.0 sen from 178.0 sen/ 195.0 sen."