How Have Falling Oil Prices Affected Philip Morris’ Performance in Saudi Arabia?

+17.98%
Upside
91.62
Market
108
Trefis
PM: Philip Morris logo
PM
Philip Morris

Saudi Arabia has imposed hefty taxes on tobacco products, sugary soft drinks, and energy drinks in the quarter starting in April. A 100% tax was placed on cigarettes and energy drinks, as well as a 50% tax on soft drinks. These taxes were first proposed by the Gulf Cooperation Council (GCC) in 2015, but Saudi Arabia signed an agreement to put them into effect only earlier this year. The kingdom is also the first GCC member to announce a specific timeline for the implementation of the taxes. In addition to these taxes, the new budget has called for a number of other significant changes, including a 5% value-added tax to be applied to certain goods, stemming from the collapse in the oil prices. The implementation of this tax on tobacco has resulted in cigarette volumes plummeting in the region, a fact that has hurt Philip Morris International (NYSE:PM) tremendously as the company has a leading share in the market.

We have a $118 price estimate for Philip Morris, which is 15% higher than the current market price.

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Oil Price Fall Wreaking Havoc On Saudi Arabia…

Saudi Arabia is the largest oil exporter in the world and is the biggest economy in the Arab region. However, its coffers have taken a hit amid the oil price free-fall, with the price per barrel dropping from $115 in mid-2014 to the $50 to $60 range currently. As a consequence of the low oil prices, Saudi Arabia posted record-high budget deficits of $98 billion in 2015, which shrank to $79 billion in 2016. This forced the kingdom to announce its ambitious agenda, called Vision 2020, aimed at reducing its high dependence on oil by changing the way it generates its income.

… And Consequently On Philip Morris

The 100% hike in excise taxes, which resulted in the doubling of cigarette prices in Saudi Arabia, have been driving higher the anticipated declines in the cigarette industry volume, particularly of the highly profitable premium segment where Marlboro is the leading brand. The industry volumes in the region plummeted 30% in the third quarter, and are expected to remain weak well into 2018.

Saudi Arabia is not a small tobacco market. The volumes in 2016 were around 32 billion units, with Philip Morris having a 41% market share and Marlboro alone with 28%. Another factor impacting PMI is the high margins garnered from the region, which is above the average attained by the company. Hence, if the volumes fall by 30%, it would put significant pressure on the financials of the company as a whole.

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Notes:

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