PP 7767/09/2010(025354)

Malaysia Corporate Highlights RHB Research

Institute Sdn Bhd
A member of the
RHB Banking Group
R e su l ts N o t e Company No: 233327 -M

23 April 2010
MARKET DATELINE

British American Tobacco Share Price

Fair Value
:
:
RM42.78
RM38.95
TIV Remains Under Pressure Recom : Underperform
(Maintained)

Table 1: Investment Statistics (BAT ; Code: 4162) Bloomberg Ticker: ROTH MK

FYE Dec Revenue Net Profit EPS EPS gwth PER C.EPS* P/NTA Net gearing ROE Net. Div.
(RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) Yld. (%)
2009a 3,923.4 746.8 261.5 -8.0 16.4 - 4.4 1.1 176.5 5.5
2010f 3,921.6 697.3 244.2 -6.6 17.5 255.0 1.2 0.9 147.2 5.1
2011f 3,926.9 667.6 233.8 -4.3 18.3 258.0 0.7 0.9 123.2 4.9
2012f 3,988.7 668.3 234.0 0.1 18.3 265.0 0.5 0.4 109.8 4.9
Main Market Listing / Trustee Stock / non-Syariah-Approved Stock By The SC * Consensus based on IBES Estimates

♦ Within expectations. BAT’s 1QFY12/10’s net profit of RM191.9m (-6.8%

RHBRI Vs. Consensus
Above
yoy) was within our and consensus expectations, accounting for 28% and
In Line
26% of our and consensus forecasts respectively. As expected, no dividend Below
was declared during the quarter.
Issued Capital (m shares) 285.5

♦ Yoy. Revenue increased by 1.3% yoy - driven by higher excise duty- led
Market Cap(RMm) 12,215.0
Daily Trading Vol (m shs) 0.1
pricing and improved product mix, slightly offset by lower sales volumes (-
52wk Price Range (RM) 41.00-49.12
2.9% yoy). However, net profit dropped by 6.8% due to higher costs of Major Shareholders: (%)
Dunhill Reloc packs, adverse timing of marketing and overhead BAT Holdings (M) BV 50.0
expenditure, higher finance costs and effective tax rate, partially offset by Amanah Raya 9.0
productivity and continuing cost management initiatives.
FYE Dec FY10 FY11 FY12
EPS chg (%) - - -
♦ Global Drive Brands driving increase in market share. Despite the Var to Cons (%) -4.2 -9.4 -11.6
drop in volumes by 2.9% yoy in 1Q10, BAT has managed to maintain its
market share for YTD-Feb 10 at 59.9%. This was driven mainly by its Global PE Band Chart
Drive Brands i.e. Kent and Pall Mall, which grew by 0.2%-pt yoy and 0.3%-
pt yoy respectively.

PER = 19x
♦ Stabilising TIV. Although TIV was flat yoy in 1Q10 vs. -11.2% yoy in PER = 17x
PER = 15x
FY10, we expect TIV to remain under pressure given the continued high
levels of illicit cigarettes of approximately 37-37.5% in 4Q09 coupled with
the implementation of the less than 20s pack ban in Jun 10. We believe the
less than 20s pack ban could lead to consumers trading down to illicit
Relative Performance To FBM KLCI
cigarettes as affordability of duty-paid cigarettes reduces further. As such,
we maintain our TIV assumption of -5% in 2010. FBM KLCI

♦ Risks. The key risks include: 1) more government campaigns to discourage

smoking like a potential ban on public smoking, which may result in turning BAT

potential new smokers away; and 2) increasing illicit cigarettes market.

♦ Forecasts. No changes to our earnings forecasts.

♦ Investment case. Given the risk from the implementation of the less than
20s pack ban in Jun 10, we believe the tobacco sector would remain under
pressure. As such, we maintain our Underperform recommendation on Hoe Lee Leng
BAT with an unchanged DCF-derived fair value of RM38.95 based on (603) 92802239
hoe.lee.leng@rhb.com.my
unchanged WACC of 7.9%.
Please read important disclosures at the end of this report.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 1 of 3
available for download from www.rhbinvest.com
 Table 2. Earnings Review

QoQ YoY
FYE Dec (RMm) 1Q09 4Q09 1Q10 (%) (%) Comments
Revenue 1,005.6 1,021.0 1,018.8 (0.2) 1.3 1.3% yoy revenue increase driven by higher excise duty led
pricing and improved product mix; slightly offset by lower sales
volumes (-2.9% yoy).
EBIT 279.4 235.4 264.9 12.5 (5.2) Margins dropped due to higher costs of Dunhill Reloc packs and
timing of marketing and overhead expenditure.
Finance cost (6.6) (7.5) (6.8) (9.7) 1.8
PBT 272.8 227.9 258.1 13.3 (5.4) Filtered down from EBIT.
Taxation (66.8) (55.0) (66.2) 20.4 (0.9)
Net profit 205.9 172.9 191.9 11.0 (6.8) Filtered down from PBT, marginally higher finance costs and
higher effective tax rate

EPS (sen) 72.1 60.5 67.2 11.1 (6.8)

Dividend - net (sen) 0.0 62.0 0.0 - -

EBIT margin (%) 27.8 23.1 26.0 2.9 (1.8)

PBT margin (%) 27.1 22.3 25.3 3.0 (1.8)
Net profit margin 20.5 16.9 18.8 1.9 (1.6)
(%)
Effective tax rate 24.5 24.1 25.7 1.5 1.2 Higher than effective statutory tax rate due to non-deductible
(%) interest expense following BAT’s move to the single tier tax
system.
Other information
- Shipment vol (bn 3.5 3.5 3.5 0.3% 0.0% TIV was relatively flat due to increase in illicit cigarette
sticks) crackdown, which management estimates could have reduced
illicit market share by 1-2% in the last few months
- BAT's sales vol (bn 2.3 2.3 2.3 (1.7)% (3.0)% The decrease of 3% yoy was due to decline in sales of Dunhill
sticks) 14’s caused by the recent price hikes
- BAT's market share 59.9 60.3 59.9 (0.4)%- 0.0%-pt Losing market share to JTI in the VFM segment
(%) pt
- Share of premium 73.2 74.7 74.0 (0.7)%- 0.8%-pt Improved due to shift of volumes to 20’s from 14’s
brand (%) pt
- Share of value 37.1 37.0 36.5 (0.5)%- (0.6)%- Affected after the implementation of price parity for all packs of
brand (%) pt pt cigarettes (which affected the 18s and 25s) and migration
programme for tail-end brands (Perillys and Peter Stuyvesant).
- Dunhill's Retail 43.7 43.6 43.7 0.1%-pt 0.0%-pt Remained relatively resilient
Audit Share (%)
- Kent’s Retail Audit 2.6 2.7 2.8 0.1%-pt 0.2%-pt Improved due to increased brand building activities
Share (%)
- Pall Mall's Retail 7.6 7.9 7.9 0.0%-pt 0.3%-pt Improved after relaunch of new superior blend for “Red & Blue”
Audit share (%)
Source: Company, RHBRI

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

FYE Dec FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F
(RMm)
Turnover 3,923.4 3,921.6 3,926.9 3,988.7 TIV Total (bn sticks) 12.9 12.9 13.2
Turnover (5.1) (0.0) 0.1 1.6 TIV Premium (%) 70.0% 70.0% 70.0%
growth (%)
TIV VFM (%) 22.0% 22.0% 22.0%
Cost of Sales (2,379.0) (2,457.7) (2,488.1) (2,528.4)
Gross Profit 1,544.4 1,463.9 1,438.8 1,460.4 BAT's market share
Gross Margin 39.4 37.3 36.6 36.6 Premium (%) 73.3% 73.3% 73.3%
(%)
VFM (%) 36.5% 37.0% 37.0%
EBITDA 1,104.6 1,018.6 993.0 1,007.4

Depreciation (71.4) (60.2) (74.1) (74.2)

Net Interest (27.8) (28.7) (28.7) (42.2)
Associates 0.0 0.0 0.0 0.0

Pretax 1,005.3 929.8 890.2 891.0

Profit
Tax (258.5) (232.4) (222.5) (222.8)
Net Profit 746.8 697.3 667.6 668.3
Source: Company data, RHBRI estimates

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 2 of 3
available for download from www.rhbinvest.com
IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be
contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

A comprehensive range of market research reports by award-winning economists and analysts are exclusively Page 3 of 3
available for download from www.rhbinvest.com