By Xavier Kong
With the possibility of an excise duty hike in Budget 2014, RHB Research has dropped the rating of the brewery and tobacco sectors to ‘underweight’ from ‘neutral’, and downgraded the stocks under their coverage to ‘sell’.
The bank-backed research house believes the malt liquor market would be adversely affected should the Government impose the excise duty hike on beer, with Carlsberg Brewery Malaysia taking a harder hit than Guinness Anchor, who has a solid and entrenched foothold in the off-trade and traditional on-trade channels. With those particular channels comprising of habitual drinkers who are less price-sensitive, RHB Research believes Guinness Anchor should be less affected.
However, the stocks of both the company are still downgraded to sell by RHB, due to their rich valuations, slowing malt liquor market growth, and the potential hike in beer excise duty. The research house lowered their future value for Guinness Anchor from RM20.46 to RM15.19 and Carlsberg Brewery Malaysia dropped from RM13.32 to RM11.31. These figures were based on a Free Cash Flow for the Firm (FCFF) valuation.
“In a rising bond yield environment, we believe companies that offer high dividends but which have limited growth opportunities do not deserve to trade at such high price earning ratios.” says RHB Research.
In the tobacco sector, the potential hike in excise duties continues to rear its head as RHB Research expects industry cigarette sales to come under renewed pressure. Both the stocks of British American Tobacco and JT International are being downgraded to sell, due to their rich valuations, slowing industry volume and the hike in excise duty.
RHB’s future value for British American Tobacco was lowered to RM54.60 from RM61.07, while JT International’s future value was dropped to RM5.72 from RM6.93, with the values coming from a FCFF valuation as well.
The yield appeal of tobacco stocks is fading amid rising bond yields as there is now weaker justification for their already demanding valuations. However, the research house also expressed that British American Tobacco is more in place to weather the storm as it has a firm stranglehold in the premium segment where demand is more inelastic.
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