Friday's Budget: Smokers likely to feel heat but drinkers may continue cheer

PETALING JAYA: Analysts expect a moderate hike in tobacco excise duty but the brewery sector may be spared any tax increases in the upcoming Budget 2012 which will be tabled on Friday.

MIDF Research in a research report said it expected the tobacco industry to be subjected to a moderate duty hike of one to two sen per stick.

“This translates to an increase of 4.5% to 9% year-on-year from the current excise duty of 22 sen per stick. Nonetheless, we anticipate that a drastic hike is unlikely given the prevalence of high illicit trade and steep excise hike in 2010,” it said.

MIDF noted that tobacco players had historically tempered the negative impact of lower industry demand on profits via higher selling prices, adding that the expected duty hike of one to two sen per stick could push up the prices of premium cigarettes from RM10 per pack to RM10.20-RM10.30.

“While this is only a marginal 2% to 3% increase, the impact of the hike could be significant as any price above RM10 could be a psychological deterrent and may trigger smokers to seek cheaper substitutes,” it said.

The report added that should cigarette prices increase, it could lead to “downtrading” from higher proportion of premium smokers to value-for-money (VFM) brands and from VFM brands to illicit cigarettes.

“We expect the duty hike to have a stronger impact towards VFM brands vis-a-vis the premium as VFM smokers tend to be more price sensitive. In addition, VFM smokers are likely to be prime candidates to switch to sub-VFM/cheap white cigarettes and illicit cigarettes,” it said.

MIDF pointed out that the incidence of illicit trade declined from a high of 39.7% during the March to May 2010 period to 32.5% during the October to December 2010 period.

“The fall was mainly due to the sub-VFM/cheap white cigarettes which are selling at below the stipulated minimum price of RM7 per pack. This indicates that the lower-end price-sensitive consumers have switched from illicit to sub-VFM/cheap white cigarettes.”

MIDF said it was not expecting the possible duty hike to have an adverse impact on tobacco players' earnings as the higher tax should be offset by the selling price increase.

“Tobacco players have historically directed part of the price increase to promotional efforts to mitigate the potential negative impact on total industry volume demand and possible deterioration in the premium segment to VFM (brands) as a result of the downtrading activity.”

OSK Research in its recent report also concurred that a moderate hike in excise duties for the tobacco sector was imminent.

“In the upcoming Budget 2012, we believe that the question is not whether there would be an excise duty hike, but rather, by how much,” it said, adding that excise duties had been raised every single year since Budget 2004, with the upcoming budget expected to be no different.

“We are of the view that tobacco players will be hit by a moderate hike of one to 1.5 sen per stick, which translates into a 4.5% to 6.8% year-on-year increase. We believe a drastic hike (exceeding 10%) is unlikely given the prevalence of high illicit trade and the already-steep hike last year.”

OSK, meanwhile, said the brewery sector was likely to be spared any tax hike this year, noting that beer duties in Malaysia were already one of the highest in the world.

“Malaysia's beer duties are the second highest globally and highest on a GDP (gross domestic product)-adjusted-basis. A further increase on the already high beer duties would have a significant negative impact on duty collection. This was evident during the 2004 to 2006 period when excise duty rose at a compounded annual growth rate (CAGR) of 18.5% but its collection only went up by 5.1%,” it said.

Guinness Anchor Bhd managing director Charles Ireland told StarBiz in an e-mail that the company was hopeful the Government would not raise excise duty this year.

“The last increase was in 2005. There were three consecutive years of excise duty increase from 2003 to 2005, which resulted in excise duties increasing by over 70%.

“The beer and stout market has hardly grown in the last 14 years and if there were an increase in excise this year, we expect volumes to decline. This in turn will have a detrimental effect on the industry and the economy,” he said, adding that local beer industry paid RM1.4bil in tax revenue in 2010.

OSK also pointed out that the malt liquor market volume in Malaysia had remained slow over the long term, growing only at a CAGR of a mere 0.8%.

“Further, data from WHO (World Health Organisation) indicates that alcohol consumption in Malaysia is far from alarming. In fact, Malaysia's per capita consumption is less than a quarter of the regional average,” the research report said.

British American Tobacco (M) Bhd managing director William Toh said given the severity of the illegal cigarettes incidence in Malaysia, the industry was hopeful that the Government would take a moderate tax approach to cigarette excise in the upcoming budget.

“International experiences have proven that smaller and gradual tax increases will allow consumers to adjust to price changes, and are therefore less likely to fuel demand for illegal cigarettes. On the contrary, excessive tax increases cause significant price shocks to consumers who will then accelerate their purchases of cheap illegal cigarettes as alternatives.”