Puff power!

The upward revision in tax on cigarettes as well as foreign interest saw market value of Ceylon Tobacco rocket to over Rs. 112 billion last week.

It is the first time that CTC’s market capitalisation had surpassed the Rs. 100 billion mark.

Last week saw CTC share price swell by Rs. 83.90 to close at Rs. 599 whilst it hit an all time high of Rs. 600. This rise was after CTC in the previous week established a new 52-week high of Rs. 520 surpassing the previous best of Rs. 515.

CTC finished 2011 at a price of Rs. 490.10 and a market capitalisation of Rs. 91.8 billion. At last week’s peak of Rs. 600, CTC share price has risen by 22% or Rs. 110. This reinforces the fact there is still scope for gains in the Colombo Bourse if one invests in fundamentally sound stocks with future upside.

Traditionally illiquid, CTC however has seen fairly active trading. Last week though only 125,452 shares traded in the previous week a much higher quantum of 485,608 shares traded.

Foreigners have been favouring CTC as its non-national holding had increased by nearly 1 million shares as of last week from end 2011. British American Tobacco (BAT) is the majority shareholder of CTC.

As exclusively reported by the Daily FT on 9 February (CTC overtakes Carson to be third most valuable) and 10 February (CTC rises to number 2), the rise of CTC has remained consistent. At a market capitalisation of Rs. 112.2 billion, it is a clear number two with Carson at number three with Rs. 97.2 billion and Bukit at number four with a value of Rs. 86.48 billion.

JKH remains most valuable with a market capitalisation of Rs. 176.67 billion.

Last week excise duties on cigarettes were increased by approximately Rs.0.57-0.70 per stick, resulting in price of fags increase by one rupee per stick.

Following the hike, CT Smith Stockbrokers on account of the higher average price per cigarette, last week revised up CTC’s net profit forecast for 2012E by 2.8% to Rs.7,914mn (up 21% YoY), and 2.5% to Rs.8,542mn for 2013E (up 8% YoY).

The broking firm had previously expected cigarette prices to increase Rs.2.00 per stick in October 2012, and since a one rupee hike came in last week CT Smith revised expectations to incorporate a further Re.1.00 per stick price increase in October 2012.

The average price per cigarette is estimated to increase 2.4% to Rs.21.2 in 2012E (up 21% YoY), and to

Rs.22.8 in 2013E (up 8% YoY)

CT Smith said despite the relatively inelastic nature of the product, it has slightly revised down its volume growth expectations for 2012E from 1.00% to 0.75% (4.4bn sticks), given the tightening macroeconomic conditions and proximity of the previous price increase (Rs.2.00 per stick in October 2011). It expects volume growth to stagnate in 2013E

“Overall, CTC is expected to be a net beneficiary from the duty revision, as in addition to passing the excise duty in full to customers, the company likely keeps a small margin on price increases, as seen by the decline in the excise duty: gross revenue margin, which has improved from 66.6% in 2009 to 66.0% in 2011,” CT Smith added.

On revised expectations (MPS of Rs.540), CTC trades at PER multiples of 12.8X 2012E and 11.8X 2013E, with forecast dividends of Rs.42.2 for 2012E (net dividend yield of 7.0%), and Rs.45.6 for 2013E (net dividend yield of 7.6%).

CTC also provides superior ROEs of 212.8% for 2012E and 238.8% for 2013E (equity is however understated as land revaluation is yet to be incorporated into its accounts), and “the defensive share is likely to remain in favour amid an uncertain broader market outlook,” CT Smith added.