PP 7767/09/2010(025354)

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
31 May 2010
MARKET DATELINE

Consumer Sector - Tobacco Recom : Neutral

(Maintained)
Small Pack Ban Delayed To 1 Jan 2011

Table 1 Consumer Valuations

Fair EPS EPS growth PER P/NTA P/CF GDY
FYE Price Value (sen) (%) (x) (x) (x) (%) Rec
(RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
KFC Dec 8.50 9.63 77.1 89.5 17.2 16.2 11.0 9.5 2.0 7.0 3.1 OP
Amway Dec 7.50 8.45 54.5 56.5 23.6 3.5 13.8 13.3 5.0 7.4 6.7 OP
Carlsberg Dec 4.73 5.85 42.1 44.3 68.1 5.3 11.2 10.7 2.6 21.5 5.2 OP
Daibochi Dec 2.86 4.20 35.1 38.0 16.9 8.3 8.2 7.5 3.0 6.8 7.9 OP
AEON Dec 4.98 5.80 41.4 45.2 8.7 9.4 12.0 11.0 1.6 11.0 2.4 OP
Parkson Jun 5.23 6.40 29.2 36.3 15.0 24.3 17.9 14.4 2.7 7.1 1.3 OP
Faber Dec 2.36 3.40 26.5 24.2 16.4 -8.8 8.9 9.8 2.0 5.6 3.0 OP
QL
Resources Mar 3.72 4.60 31.1 36.5 15.4 17.4 12.0 10.2 2.6 8.3 2.8 OP
KPJ Health Dec 2.90 3.20 21.9 23.2 17.3 6.0 13.2 12.5 1.3 11.8 4.8 MP
Hai-O^ Apr 3.90 4.30 43.1 55.0 18.7 27.7 9.1 7.1 1.3 4.5 7.4 MP
BAT Dec 43.20 38.95 243.5 233.2 -6.9 -4.2 17.7 18.5 n.m 13.2 5.1 UP
Sector Avg 8.7 7.1 14.6 13.7
^ FY10-11 valuations refer to those of FY11-FY12

♦ Delay in less than 20s pack ban. According to media sources, the Ministry of
Chart 1. TIV of Cigarettes
Health (MOH) confirmed that it will delay the ban on sale of less than 20s pack bn sticks
to 1 Jan 11 (initially set to be implemented on 1 Jun 10), citing that it has yet 25

to complete a comprehensive study on its impact on the sale of illicit cigarettes 20

in the country. This is the third time the ban has been postponed. 15

♦ Caught everyone by surprise. We understand that this delay has caught 10

both industry players and non-government health organisations by surprise, as 5

the news on the delay came in less than one week ahead of the initial
0
implementation date (1 Jun 10) and conflicts with MOH’s objective in restricting 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

access to cigarettes, especially among adolescents and the lower income

group. Furthermore, the flip flop in Govermnent policy could cause confusion
amongst industry players and investors.

♦ Loss in potential income. We understand that industry players have already

started phasing out their less than 20s pack inventory over the past 5 months
and decommissioned their manufacturing equipment (for the less than 20s
pack). Hence, additional costs would need to be incurred if the players decide
to recommission the production line, which we believe, would be subjected to
further feasibility studies by each player. We also believe that players may
seek compensation from the Government for any loss in potential income due
to the delay. We are unable to assess the strategy that BAT would implement
at this juncture, and its impact to the company’s bottomline.

♦ Forecasts. Pending further information from management, we maintain our

earnings forecasts of BAT for now.

♦ Risks: 1) Regulatory constraints; 2) Intensifying competition; and 3) Higher

influx of illicit cigarettes.

♦ Investment case. No change to our DCF-based (WACC 7.9%) valuation of

RM38.95 for BAT and our Underperform call on the stock.
Hoe Lee Leng
(603) 92802239
IMPORTANT DISCLOSURES
Please read important disclosures at the end of this report. hoe.lee.leng@rhb.com.my

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 31 May 2010

IMPORTANT DISCLOSURES
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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
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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.

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