Analyst: Nafees Mohammed Badruddin

nafees.badruddin@bracepl.com (880) 173 072 7931

Valuation revised up for BATBC

British American Tobacco Bangladesh DSE: BATBC Bloomberg: BATBC:BD
Company Summary 52-Week Price Range (BDT) Current Price (BDT) May 15, 2012 Fair Value (BDT) Estimate, Dec 31, 2012 Price Return Dividend Yield Total Return Number of shares MM Market Cap BDT MM Free Float Average Daily Turnover (LTM) BDT MM Rev & Profit (BDT MM) Revenue Gross Profit EBIT EBITDA Net Income Margin Gross Margin EBIT Margin EBITDA Margin Net Income Margin Cash Flow Operating Investing Financing Dividends Per Share (BDT) EPS DPS BVPS Valuation P/E P/B Dividend Yield 2011A 23,269 9,813 4,914 5,456 2,550.6 2011A 42.2% 22.7% 25.4% 11.0% 2011A 2012E 24,845 10,540 5,477 6,053 3,176.7 2012E 42.4% 23.5% 26.2% 12.8% 2012E 4,529 (736) (2,616) (2,520) 2012E 52.9 50.0 109.5 2012E 12.8x 6.2x 8.2% 510-661 610 680.0 11.5% 8.2% 19.7% 60 36,600 33.5 8.2 2013E 26,800 11,470 6,379 6,983 3,827.4 2013E 42.8% 25.2% 27.8% 14.3% 2013E 4,740 (773) (3,131) (3,000) 2013E 63.8 60.0 123.0 2013E 10.7x 5.5x 9.8%

Rating: Sector Perform 7 Month Fair Value Estimate: BDT 680 per share May 16, 2012 In 2011, BATBC overcame most of the competitive and regulatory challenges. Following the trend of the last 5 years, the 2011/12 budget increased the duty on cigarettes , and additionally, corporate tax rate for listed cigarette companies increased from 27.5% to 35%. Despite the increased duty, in 2011, BATBC managed to increase its net revenue by 11.1% YoY. As we expected earlier, tax-led 9.3% price growth, drove top line growth. Operating profit growth was better at 23.1% due to significant efficiency gain. In contrast, earnings fell by 11.4% as increased corporate tax rate was applied retrospectively. We estimate that BATBCs revenue growth will average 7.6% for the next five years lower than last 5-year CAGR of 14.3%. With such topline growth, margins will improve to 26% in next 5 years from their pre2011 level of 16%, due to company-wide efficiency drive and reversion from unsustainable marketing and tax expenses. BATBC is currently in the highest corporate tax bracket of 35% after last years tax revision. We don't expect further increase of corporate tax in the next budget. Moreover, effective tax rate will decline from 2011s peak, which will improve net profit margin in coming years. Free cash flow of the company will improve since there is no expansion plan in next two/ three years. Improving operating margin, better working capital management together with lower capital expenditure requirement will drive sound cash flow and dividend payout in coming years. We maintain our previous rating Sector-perform and revised up fair value estimate to BDT 680 per share for December, 2012. Better margin and cash flow outlook drive this 7.1% fair value revision from previous estimate of BDT 635. We assumed 4% terminal growth rate for cash flows and 15% WACC to value the company. New fair value estimate implies capital gain and dividend yield of 11.5% and 8.2% respectively on the basis of current share price. Q1/12 earnings were in line with our expectation. In spite of double digit inflationary pressure, considerable depreciation of the local currency and increased promotional expenses in the quarter, BATBC managed to grow earnings by 2.6% YoY thanks to significant efficiency gain and non-recurrence of one-off tax impact. We expect earnings surprise for Q2/12 which may drive immediate performance of the stock. Such earnings surprise will be driven by priceincrease, stability of the local currency since Q1/12, reduction of unsustainable promotional expenses and much lower effective tax rate. Additionally, unsustainable 90% effective tax dragged Q2/11s earnings and such low base will boost earnings growth for Q2/12. Hence, we believe this is a proper accumulation phase for the stock.

2011A 42.5 42.0 98.5 2011A 14.1x 6.1x 6.9%

Source: Company Data, BRAC EPL Research, September 2011

Chart 1: Price performance of BATBC since January 2011

750 180.0

700

150.0

600

90.0

550

60.0

500

30.0

450 .0 Dec-10 Jan-11 Mar-11 Apr-11 May-11 Jun-11 Jun-11 Jul-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Turnover Price

Source : DSE, BRAC EPL Research, May 2011

Turnover, BDT MM

650
Price, BDT

120.0

British American Tobacco Bangladesh

(DSE: BATBC; Bloomberg: BATBC:BD)
Review of the tobacco Industry
Chart 1: Market composition of the whole tobacco industry 100%
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
20% 51%

Tobacco Industry In 2011, total sales in the tobacco industry of Bangladesh was 134 billion sticks. With gradual rise of per capita income of young population and increased awareness against ill-effect of hand-rolled cigarettes, filter cigarette segment is becoming increasingly popular. This segment registered significant growth in the last decade when its market share increased from 20% in 2002 to 51% in 2011. Such shift in tobacco consumption pattern is likely to continue at slower pace since the base is quite high now. After last years duty and vat increments, cigarette sales slowed down. We expect factory-made, filtered cigarette market to grow by 1.5% annually over the next 5 years.

80%
49%

2002
Handmade filterless cigarettes

2011
Filtered cigarettes

Source : Management-meetings & BRAC EPL Research, April 2012

Chart 2: Volume market share in filtered cigarette industry

Others 4%

Filter cigarette market BATBC leads the filter cigarette industry with a revenue market share of 59% and volume market share of 39%. With clear dominance in the premium segments, BATBC is more focused now to drive growth in the lower segments where Abul Khair Tobacco Company (AKTC) and Dhaka Tobacco Industry (DTI) have strong presence. Such strategy was helped by last years duty hike by 25-30% for BDT 1 cigarettes (lowsegments). Together BATBC, AKTC and DTI dominate the filter cigarette market with a combined

AKTC 15%

BATB C 39%

DTI 42%

Source : Management-meetings & BRAC EPL Research, April 2012

market share of 96%.

Table 1: Price structure of the different segments

Segments Premium

BATBC Contemporary products

Benson & Hedges John Player Goldleaf, Pall Mall and Aspirational Premium Capstan Value For Money (VFM) Star and Scissors Low
Source : Budget speech for fiscal year 2011-12

Previous price Revised Price per per ten sticks ten sticks BDT 52 & above BDT 60 & above BDT 27.0 - 32.0 BDT 18.4 - 19.0 BDT 32.0 - 36.0 BDT 22.50-23.00 BDT 11.0 -11.30

Viceroy, Pilot, Bristol and Hollywood BDT 8.4 - 9.15

Price led revenue growth to continue Low segment volume growth to improve
Low segment accounts for 60% volume share of the filter cigarette industry. This segment grows the fastest as hand-rolled, filterless cigarette consumers preference shifts.

The net incidence rate towards filter cigarettes suggests the general trend of up-trade from hand-rolled filter-less cigarettes to filter cigarettes, especially in the low segments. As a result, the low segment constitutes 60% of the filter cigarette industry and it is growing at above industry-average rate. BATBC experienced intense price-competition in the low segment where AKTC and DTI had stronger presence. BATBCs conformity with quality control and regulatory compliance is more stringent than those of its competitors. As a result, its cost structure which undermined its competitiveness in the lower segments low price that prevailed, has been higher than that of its competitors. With 25-30% tax-led price increase in the low segment after the 2011-12 fiscal budget, BATBC is now better positioned to grow their share in this segment. Immediately after the tax-led price increase in June 2011, both AKTC and DTI maintained pre-tax increase product prices, thereby subsidizing for the increased VAT & duty. BATBC responded with similar strategy and subsidized customers until March 2012 when all the

Table 2: Recent low segment product launches by BATBC

Year 2008 2009 2010 2011

Source : BATBC annual reports

Products Launched Viceroy Pilot Bristol Hollywood

British American Tobacco Bangladesh

(DSE: BATBC; Bloomberg: BATBC:BD)
players adjusted prices upwards.
Increased price ceiling in the low segment after the 2011-12 fiscal budget helped BATBC to drive growth in the low segment

Currently, in absence of subsidy-based promotion, BATBCs share in this segment is likely to have increased. With more room to maneuver under a ceiling of BDT 1.5/stick and 4 new products in the low segment (shown in chart 2 in the previous page), BATBC is set to increase its market share further above the 12% that it already occupies in the segment. A stronger position in the low segment will also allow it to net the down-traders that it used to lose from the VFM segment. BATBCs 2011 sales in the low segment was 15.1 billion sticks compared to 5.6 billion sticks in 2006. With an average growth rate of 22% in the low segment over the last 5 years, it can be estimated that BATBC will sustain, if not improve, this segments such high growth in the coming years. Premium Segment to stay resilient

BATBCs stick sales in the low segment grew from 5.6 billion in 2006 to 15.1 billion in 2011

BATBC retains 99% market share in the premium segment

BATBCs B&H has a monopoly in the Premium Segment and till 2008 had no competitors. However, in May of 2008, Phillip Morris with the help of Dhaka Tobacco Industries (DTI) launched its Marlboro Brand in Bangladesh. Despite its initial promotional initiatives (Phillip Morris spent GBP 3 million for promotions in 2011 alone ), after four years of its launch Marlboro occupies 1% compared to 99% for B&H in the premium segment. Monthly sales of Marlboro stands at roughly 5 million sticks compared to 400 million sales of B&H. In the premium segment, BATBC looks poised to grow steadily with little threat from the Phillip Morris entry. The foreseeable threat that BATBC faces in the aspiration segment is from its own premium segment as consumers usually up-trade from this segment to BATBCs premium segment. Revenue growth to continue BATBC managed to increase its cigarette sales up to 26.5 billion in 2011 a 1.7% growth over 2010s volume, despite 12% tax-led increase in blended gross price after the 2011-12 fiscal budget.

Premium segment cannibalizing the aspiration premium segment

Net revenue to grow at 7.6% on average for the next 5 years

The demand for BATBCs products is price-inelastic. Moreover, since 2003, sales volume went down only once after tax-led price increase and net revenue grew consistently. Since demand for BATBCs product is price-inelastic, if VAT & duty increases in coming years, net revenue growth will continue at an average of 7.6% in the next 5 years.
Chart 4: Volume growth comparison with VAT & Duty per stick
2.5 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% 2003 2004 2005 2006 2007 2008 2009 2010 2011

Chart 3: Cigarette sales of BATBC

30,000 25,000 20,000 15,000 10,000

2.0
1.5 1.0 0.5

5,000
2003 2004 2005 2006 2007 2008 2009 2010 2011

Cigarettes sold (in millions)

Source : BATBC annual reports

VAT & Duty/ Stick (LHS)

Source : BRAC EPL Research, May 2012

Volume Growth (RHS)

British American Tobacco Bangladesh

(DSE: BATBC; Bloomberg: BATBC:BD) Margins to improve
Operating margins to improve to 26% BATBC has created an enabling environment for operating efficiency. Over the years it took strategic decisions which resulted in the improvement of operating margins for the last 6 years. Apart from that, BATBC increased the capacity of its production unit in Dhaka from 25 billion sticks to 30 billion sticks in 2010 and increased the capacity of its leaf processing plant in Kushtia which will half the leaf processing-time to 3 months from 6 month. This will reduce overheads in 2012 and beyond. These two major capital expenditures also help BATBC to trigger economies of scale and contribute to operating margin improvement as shown in the Chart 6 in the following page.
Chart 5: Composition of BATBCs operating expenses

100% 80%

60%
40% 20% 0%

2002 Raw Materials

2003

2004

2005

2006

2007

2008

2009

2010

2011

Production Overhead Repair and Maintenance Other expenses Contribution to WPPF

Salary Expense Technical and Assistance fee Financial Expense

Trade/Promotional Expense Depreciation Income Tax Expense

Source : BATBC annual reports

In spite of double digit inflations, 2011s raw material cost was brought down to 57% of total operating expense compared to 80% in 2002

BATBC also assisted its registered farmers to grow improved quality leaves at lower production costs. A hybrid variation of local leaf that yields 25% more was promoted among the farmers. It enables more local leaf-sourcing strategy to cut leaf-import bill, thereby helping cost optimization. Additionally, productivity growth (as measured by cigarettes per man-hour), warehousing and logistical improvement, waste reduction contributes to cut cost of raw materials significantly. Raw material cost was 57% of total operating expenses in 2011- came down by 22% from 2002s 80% as can be seen in Chart 5. BATBCs import bills were hedged against the depreciation of BDT in 2011. Imported material comprises 32% of total material costs of the company. 90% of this importpayment is covered by BATBCs leaf-export proceed. This natural currency hedged position checked import cost hike in 2011 when BDT depreciated by 18% against US$. With factory transformations, continuous productivity gains, waste reductions, warehousing, logistical improvements and leaf productivity initiatives, we expect the operating margins to maintain at current level, if not improve, in the next 3-5 years. We estimate 26% average operating margin for the next 5 years, an improvement by 7% over last 5 years average of 19%.

BATBCs natural hedge kept its import bills manageable even after the 18% depreciation of the BDT against the US$ in 2011

Operating margin estimated to be 26% on average for the next 5 years

British American Tobacco Bangladesh

(DSE: BATBC; Bloomberg: BATBC:BD)
Effective corporate tax rate to go down gradually to ~40% in 2013
BATBC is in the highest tax bracket of 35% after 2011s increase from 27.5%. We don't expect further change in next 2/3 years.

The 2011-12 budget increased the corporate tax rate for listed cigarette companies from 27.5% to 35.0% and cut the entire 10% tax rebate for dividend paying company. BATBCs non-listed competitors are in the 42.5% tax bracket, in comparison. Retrospective application of higher tax rate pushed effective tax even higher to 48% in 2011. Despite a 20% YoY increase in earnings before tax (EBT) in 2011, net profit after tax (NPAT) registered negative growth of 11.4% due to such higher effective tax rate.
Chart 6: NPAT , tax rate and operating margin comparison Chart 7: Reconciliation of effective tax rate
60% 50% 40% 30%

25%

Effective tax rate of 48% for 2011 took into account retrospective tax adjustment worth BDT 438.3 million for 2010 a non-recurring adjustment.

20% 15% 10% 5% 0%

4% 9%
5% 35% 25% 2010
Previous year adjustments

20% 10% 0%

2004

2005

2006

2007

2008

2009

2010

2011

2011
Income Tax
Non deductible expenses
Source : BATBC Annual Reports

Effective Tax Rate (RHS)

Net Profit Margin (LHS)
Source : BATBC Annual Reports

Operating Profit Margin (LHS)

Tax rate for hand-rolled filterless cigarette marketer might increase

Following major fiscal-impositions on tobacco industry in 2010-11 and 2011-12, we do not expect major tax review for the industry in the coming budget. We expect BATBCs effective tax rate to go down to ~42% in 2012 and to be around 40% in the years to follow. We believe that in future tax bracket for the hand-rolled cigarettes will be increased unlike the exemptions it enjoyed in last few budgets. Better earning outlook Considering net revenue growth of 8% and no significant change in operating cost structure, we believe the tax expense will decrease in 2012 from its 2011s height. Consequently 2012s earnings growth will be 24.5% on the lower base of 2011. For the subsequent years till 2016 NPAT is expected to grow by 14% on average.
Table 3: Margins and growth

Margins Gross Margin EBIT Margin EBITDA Margin NOPAT Margin Net Income Margin Revenue Growth Gross Profit Growth EBIT Growth EBITDA Growth NPAT Growth
Source : BRAC EPL Research, May 2012

2010 35.7% 19.7% 22.6% 13.9% 13.7% 19.2% 22.2% 47.8% 45.1% 39.2%

2011 42.2% 21.6% 24.4% 11.2% 11.0% 11.1% 31.4% 21.8% 19.9% -11.4%

2012E 42.4% 22.5% 25.2% 13.0% 12.8% 6.8% 7.4% 11.0% 10.4% 24.5%

2013E 42.8% 24.2% 26.8% 14.5% 14.3% 7.9% 8.8% 16.1% 14.9% 20.5%

2014E 42.8% 24.3% 26.8% 14.6% 14.3% 9.5% 9.5% 9.8% 9.4% 10.0%

2015E 42.9% 24.4% 26.9% 14.7% 14.4% 7.1% 7.2% 7.7% 7.4% 7.8%

2016E 42.9% 24.5% 26.9% 14.7% 14.5% 7.1% 7.1% 7.2% 7.0% 7.3%

Chart 8: Payout ratio for BATBC

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Sound cash flow will continue to drive high dividend After its expansion in production capacity in Dhaka (2010) and leaf processing plant in Kushtia (2011), BATBC is in good shape now and the management does not see any major capex for the next 3 years. Hence for the coming years, we believe that only maintenance capex will be required for the company. Higher operating margin together with lower capex requirement will boost free cash flows for the shareholders. As a result we estimate BATBCs payout ratio to be around 95% for the next 5 years.

2007

2008

2009

2010

2011

Dividend Payout Ratio

Source : BATBC annual reports

British American Tobacco Bangladesh

(DSE: BATBC; Bloomberg: BATBC:BD)
Table 4: Forecast and Actual 2011 Net Turnover COGS Gross Profit Operating Expenses Operating Profit Depreciation Other Income Other Expense Financial Expenses Profit before WPPF Contribution to WPPF Profit before Tax Income Tax Expenses Net Profit Operating margin NPAT Margin EPS Forecast 23,116 14,142 8,974 2,973 5,363 638 54 254 42 5,120 256 4,864 2,529 2,335 19.6% 10.1% 38.91 Actual 23,269 13,456 9,813 3,738 5,533 543 23 261 122 5,172 259 4,914 2,363 2,551 23.8% 11.0% 42.51 Deviation 1% -5% 9% 26% 3% -15% -58% 3% 189% 1% 1% 1% -7% 9% 21% 9% 9%

Review of recent financial results:

2011 was better than expected 2011s revenue and volume growth were in line with our earlier estimates. Gross profit margin for the year was better than our expectation (as shown in the table 4) reflecting better efficiency gain and cost control. BATBC incurred higher trade and promotional expenses from June of 2011 as the company was reactive to competitors subsidizing strategy in the low segment. As a result, actual operating expense for 2011 was higher than our estimates. Actual earnings exceeded our expectation by 9%- thanks to lower-than-estimated effective tax rate. BATBC declared BDT 42.0 as the final dividend for 2011. In total, the company paid out BDT 2,520.0 million or 99% of earnings as cash dividend.

Source : BARC EPL Research, May 2012

Table 5: 1st quarter performance of 2012 Key Performance Indicators Net Revenue YOY Rev Growth Gross Profit Gross Profit Margin Operating Profit Operating Profit Margin Net Profit Net Profit Margin YOY Earnings Growth EPS Effective Tax
Source : BATBC website

Q1/12 results in line with 2012s expectation

Q1/12 6,045 21.50% 2,489 41.20% 1,280 21.20% 688 11.40% 2.60% 11.5 44.20%

Q1/11 4,974 2,080 41.80% 1,065 21.40% 670 13.50% 11.2 34.80%

In the face of double-digit inflation and increased promotional expenses in 1Q/12, the company managed to maintain its operating margin, thanks to the efficiency gain drives success. The corporate tax rate in Q1/11 was approximately 10% less than that in Q1/12. Such higher tax and the increased promotional expenses in 1Q/12 (which is a nontax deductible expense) explains lower net profit margin in Q1/12 despite having similar operating margin when compared to the same period last year. We believe Q2/12 earnings will be better given the lower base of Q2/11 when earnings suffered as effective tax rate went up to ~90% because of retrospective application of higher corporate tax rate. Effective tax rate is also likely to improve further during the rest of the year.

BATBC preserves shareholders capital amid market turmoil

Chart 9: Relative performance of BATBC and DGEN
120 100 80

60
40 20 0

2011 and 2012 saw continuous correction in the DSE; however BATBCs stock performance was resilient throughout as shown in the chart beside. DGEN, the benchmark index of Dhaka Stock retraced 38% since January 2011 while BATBC lost only 18%- outperforming the market by 20% thereby. BATBC remains one of the dividend aristocrats maintaining average payout ratio of 83% during last 5 years. Current dividend yield is 6.9%. We think at current weak phase of market cycle, capital preservation is the preferred investment strategy and BATBC is good fit with sizable dividend yield and lower beta.

Sep-11

Feb-11

Dec-10

Nov-11

Aug-11

May-11

Dec-11

Feb-12

Jul-11

Oct-11

Apr-11

Mar-11

BATBC

DGEN

Source : DSE, BRAC EPL Research, May 2011

Source : DSE, BRAC

Mar-12

Jan-11

Jun-11

Jan-12

Apr-12

British American Tobacco Bangladesh

(DSE: BATBC; Bloomberg: BATBC:BD)
Valuation Summary Our per share value estimate of BATBC is BDT 680.0 for up to December 2012. We used discounted cash flow model to value the company and major assumptions are as follows:
Valuation Summary

Assumptions: Valuation Method Discount rate Terminal growth rate Fair value as on December 31,2012 Discounted cash flow valuation 15.0% 4.0% BDT 680.0

Our fair value estimate embeds 12.8x forward PE and 6.2x EV/ EBITDA with net cash position. Peer-comparison We found that over the longer term BATBC trailing PE multiple reverts to the multiple applied to its parent company BAT PLX which is listed in the LSE. Currently BATBC is trading at 14.1x trailing PE at 28% discount to the 19.8x trailing PE of BAT PLC. This implies that if BATBCs earnings grow in line with our expectation (14% annually) and if earnings multiple of the company reverts to its parents level in one year horizon, BATBC may offer 35-40% capital gain. BATBCs lowest PE relative to other cigarette manufacturers, such as BAT Malaysia and BAT Kenya, also suggests possibility of multiple-expansion.
Chart 9: P/E comparison of BATBC with its peers
BAT Kenya
35.0x

BAT Malaysia

BAT plc

BATBC

30.0x
25.0x

20.0x
15.0x 10.0x 5.0x 0.0x

Source : BRAC EPL Research, May 2012

Given the socio-economic development outlook, Bangladesh will remain a relatively attractive tobacco market with a large young population base. With per capita income growth and consumption shift to premium quality brands, BATBC is strongly positioned in this market. Being a stronger player in a better market, BATBC will continue to maintain higher earnings growth and ROE in comparison to those of other markets leaders. But we believe these strong potentials have not been adequately reflected in valuation multiples as trailing PE-wise BATBC is traded at 28% discount. This all contributes to consider this stock as one of the outstanding investment opportunities from Bangladesh.
Table 6: BATBC stock return compared to its peers

Company BAT PLC BAT Kenya Pakistan Tobacco Com BAT Malaysia Bhd BATBC Median ex BATBC
Source : BRAC EPL Research, May 2012

Country/ Region Multinational Kenya Pakistan Malaysia Bangladesh

Population Share price (US$) EPS(LTM, US$) 5 Yr EPS CAGR Trailing P/E 50 2.5 8% 19.8 x 41 4 0.2 NA 18.9 x 174 1 0.0 -21% 21.3 x 28 17 0.8 -2% 20.0 x 149 7 0.5 43% 14.1 x -2% 19.9 x

ROE 38% 36% 20% 158% 42% 37%

British American Tobacco Bangladesh

(DSE: BATBC; Bloomberg: BATBC:BD) Investment Thesis Positives
Attractive valuation with forward PE of 12.8x and expected dividend yield of 6.9% A good stock to take exposure to the booming consumer sector of Bangladesh. With 150 mn people having median age of 25 years and 14% annual nominal per capita income growth, filter cigarette consumption will increase. This will drive BATBC revenue and earnings growth. Being the dominant player in the premium segment, BATBC is set to grow in the lower segments after regulatory price hike for cheap cigarettes in 2011. BATBC is very strong in the competitive landscape. Demand for cigarettes is price inelastic in general. Tax-led price increase more than offsets volume decline. Margin improvements will improve profitability and earnings growth at least up to 2013 With no plans for major capital expenditures, dividend payout ratio will remain at the higherend during the next 3/5 years One of the best managed companies of Bangladesh where minority shareholders interest is sufficiently protected through good-governance

Risks
Tougher anti-tobacco stance of government, health organizations and anti-tobacco lobbyists. This may result in increase of VAT, duty and corporate tax. The government of Bangladesh signed the Frame Work Convention on Tobacco Control (FCTC) and is yet to implement all of its regulations. This may slow the industry growth. Government policies are adhered towards restricting the tobacco cultivation growth thus the possibility of increased cost of Tobacco If Marlboro sales pick up, not only will it decrease BATBCs return from the niche segment, but it might also encourage Phillip Morris to launch other products in other segments

Catalysts
Changes in VAT, duty and tax on cigarette manufacturers in the coming budget may impair their growth and margin. Adverse and quick stock price adjustment may hurt investors.

British American Tobacco Bangladesh

(DSE: BATBC; Bloomberg: BATBC:BD)
British American Tobacco Bangladesh Pro forma Income Statement As on Dec 31 of respective years

(In BDT million) Gross Turnover Duties and VAT Net Turnover COGS Gross Profit Operating Expenses Operating Profit Other Income Other Expense Financial Expenses Profit before WPPF Contribution to WPPF Profit before Tax Income Tax Expenses Net Profit EPS Cash DPS

2010 65,987 45,040 20,946 13,476 7,470 2,977 4,494 49 193 41 4,309 215 4,093 1,215 2,879 48.0 43.0

2011 75,357 52,088 23,269 13,456 9,813 4,281 5,533 23 261 122 5,172 259 4,914 2,363 2,551 42.5 42.0

2012E 84,219 59,375 24,845 14,305 10,540 4,419 6,121 31 273 113 5,765 288 5,477 2,300 3,177 52.9 50.0

2013E 92,412 65,613 26,800 15,329 11,470 4,383 7,087 35 295 113 6,715 336 6,379 2,552 3,827 63.8 60.0

2014E 101,153 71,818 29,334 16,769 12,565 4,780 7,784 39 323 117 7,383 369 7,014 2,806 4,209 70.1 66.0

2015E 108,294 76,889 31,405 17,937 13,468 5,089 8,378 42 345 118 7,956 398 7,559 3,023 4,535 75.6 71.0

2016E 115,940 82,317 33,622 19,199 14,424 5,440 8,984 45 370 120 8,539 427 8,112 3,245 4,867 81.1 77.0

British American Tobacco Bangladesh Pro forma Balance Sheet As on Dec 31 of respective years

(In BDT million) Inventories Trade and other receivables Advance, deposit and prepayments Advance Income Tax Cash and cash equivalents Net PPE Other Investments Total Assets Bank Overdraft Short term bank loans Provision for expenses and taxes Trade and other payables Provision for corporate tax Deferred Liabilities (Gratuity) Deferred tax liability Finance Lease Shareholders Equity Equity & Liabilities

2010 4,367 488 419 1,436 1,344 5,316 13,369 1,597 2,644 2,083 252 518 35 6,241 13,369

2011 5,373 927 590 3,317 837 5,377 16,421 1,838 3,438 4,295 252 669 18 5,911 16,421

2012 5,643 674 421 3,317 2,014 5,444 17,512 2,105 3,369 4,295 252 888 35 6,568 17,512

2013 6,007 647 462 3,317 2,868 5,514 18,815 2,310 3,512 4,295 252 1,016 35 7,395 18,815

2014 6,575 708 506 3,317 3,118 5,588 19,811 2,529 3,540 4,295 252 1,156 35 8,004 19,811

2015 7,039 758 541 3,317 3,645 5,665 20,966 2,707 3,790 4,295 252 1,307 35 8,579 20,966

2016 7,536 812 580 3,317 4,203 5,746 22,194 2,898 4,058 4,295 252 1,469 35 9,186 22,194

British American Tobacco Bangladesh

(DSE: BATBC; Bloomberg: BATBC:BD)
British American Tobacco Bangladesh Pro forma Cash Flow Statement As on Dec 31 of respective years

(In BDT million)

Net income Depreciation Change in working capital Tax Adjustment - Financial Expenses Cash flow from operating activities Capital expenditure Cash flow from Investing activities + Financial Expenses Reduction in interest bearing debt Dividend Paid - Last Year Final Cash flow from Financing activities Net cash Cash beginning of period Cash ending of period

2012E 3,177 669 351 219 113 4,529 (736) (736) (113) 17 (2,520) (2,616) 1,177 837 2014

2013E 3,827 703 (30) 128 113 4,740 (773) (773) (113) (3,000) (3,113) 854 2,014 2868

2014E 4,209 738 (426) 140 117 4,778 (812) (812) (117) (3,600) (3,717) 249 2,868 3118

2015E 4,535 775 (121) 151 118 5,458 (852) (852) (118) (3,960) (4,078) 527 3,118 3645

2016E 4,867 813 (130) 162 120 5,833 (895) (895) (120) (4,260) (4,380) 558 3,645 4203

British American Tobacco Bangladesh Discounted Cash Flow Valuation

(In BDT million)

Operating Cash Flow - Capital Expenditures Free Cash FLow Terminal Value Total Cash Flow Present Value of Cash Flow Enterprise Value (BDT million) + Cash & Investments (BDT million) - Interest Bearing Debt (BDT million) Equity Value (BDT million) 7 month forward per share value (BDT) Fair Value Estimate

2012

2013 4,740 773 3,967 3,967 3,450

2014 4,778 812 3,966 3,966 2,999

2015 5,458 852 4,606 4,606 3,028

2016 5,833 895 4,938 46,686 51,623 29,516

38,993 2,014 35 40,972 683 680

10

British American Tobacco Bangladesh

(DSE: BATBC; Bloomberg: BATBC:BD)

IMPORTANT DISCLOSURES
Analyst Certification: Each research analyst and research associate who authored this document and whose name appears herein certifies that the recommendations and opinions expressed in the research report accurately reflect their personal views about any and all of the securities or issuers discussed therein that are within the coverage universe.

Disclaimer: Estimates and projections herein are our own and are based on assumptions that we believe to be reasonable. Information presented herein, while obtained from sources we believe to be reliable, is not guaranteed either as to accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any security. As it acts for public companies from time to time, BRAC-EPL may have a relationship with the above mentioned company(s). This report is intended for distribution in only those jurisdictions in which BRAC-EPL is registered and any distribution outside those jurisdictions is strictly prohibited.

Compensation of Analysts: The compensation of research analysts is intended to reflect the value of the services they provide to the clients of BRAC-EPL. As with most other employees, the compensation of research analysts is impacted by the overall profitability of the firm, which may include revenues from corporate finance activities of the firm's Corporate Finance department. However, Research analysts' compensation is not directly related to specific corporate finance transaction.

General Risk Factors: BRAC-EPL will conduct a comprehensive risk assessment for each company under coverage at the time of initiating research coverage and also revisit this assessment when subsequent update reports are published or material company events occur. Following are some general risks that can impact future operational and financial performance: (1) Industry fundamentals with respect to customer demand or product / service pricing could change expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes; (3) Unforeseen developments with respect to the management, financial condition or accounting policies alter the prospective valuation; or (4) Interest rates, currency or major segments of the economy could alter investor confidence and investment prospects.

BRAC EPL Stock Brokerage Capital Markets Group

Ali Imam Khandakar Safwan Saad Farjad Siddiqui Kallol Biswas Nafees Mohammed Badruddin Head of Research Research Associate Research Associate Research Associate Research Associate imam@bracepl.com safwan@bracepl.com farjad.siddiqui@bracepl.com kallol.biswas@bracepl.com nafees.badruddin@bracepl.com 01730 357 153 01730 357 779 01730 727 924 07130 727 930 01730 727 931

Strategic Sales
Sajid Huq Amit Head of Strategic Sales sajid.huq@bracepl.com 01755 541 254

Institutional Sales and Trading

Delwar Hussain (Del) Head of Institutional Sales and Trading del.hussain@bracepl.com 01755 541 252

BRAC EPL Research www.bracepl.com 121/B Gulshan Avenue Gulshan-2, Dhaka Phone: +880 2 881 9421-5 Fax: +880 2 881 9426 E-Mail: research@bracepl.com

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