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PP 7767/09/2011(028730)

Malaysia
Corporate Highlights RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
R esults & B r iefing Not e Company No: 233327 -M

MARKET DATELINE
21 October 2010

British American Tobacco Share Price


Fair Value
:
:
RM48.00
RM42.92
Impact Of Less Than 20’s Ban Cushioned By Recom : Underperform
Relaunch Of Peter Stuyvesant (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 16.7 - 1.8 1.1 168.5 5.4
2010f 4,038.8 722.4 253.0 -3.3 19.0 255.0 1.0 0.8 148.5 4.6
2011f 4,094.8 669.8 234.6 -7.3 20.5 258.0 0.7 0.6 118.1 4.4
2012f 4,117.7 661.9 231.8 -1.2 20.7 265.0 0.5 0.5 104.5 4.3
Main Market Listing / Trustee Stock / non-Syariah-Approved Stock By The SC * Consensus based on IBES Estimates

♦ In line. BAT’s 9MFY12/10’s net profit of RM548.4m (-4.4% yoy) was within RHBRI Vs. Consensus
expectations, accounting for 76% of both our and consensus forecasts. This Above
was on the back of a 3.6% growth in revenues. Earnings were weaker yoy In Line
due to thinner operating margins as a result of the ban on less than 20’s Below
pack. For 9MFY10, operating margin was 2.5%-pts lower than 9MFY09’s
27.5%. BAT also announced a 2nd interim dividend of 64 sen, bringing YTD Issued Capital (m shares) 285.5
total to 177 sen (9MFY09: 174 sen). Market Cap(RMm) 13,705.4
♦ Effects of ban on less than 20’s packs. Besides the impact on margins, Daily Trading Vol (m shs) 0.1
the ban also affected market share of BAT’s premium segment. 3Q10 52wk Price Range (RM) 41.42-49.94
premium market share of 72.1% was lower by 0.5%-pt from 3Q09. We Major Shareholders: (%)
understand the decline in market share was due to smokers down-trading BAT Holdings (M) BV 50.0
to lower priced Value For Money (VFM) cigarettes such as Winston and Pall Skim Amanah Saham 6.12
Mall which are cheaper and priced closer to the banned 14’s pack.
FYE Dec FY10 FY11 FY12
♦ Peter Stuyvesant to the rescue. To capture the down-trading market,
EPS chg (%) - 0.5 0.7
BAT in June relaunched Peter Stuyvesant as a VFM brand. We were
Var to Cons (%) -0.8 -9.1 -12.8
positively surprised at the response as Peter gained 2.6% market share
after just four months of being launched, with minimal canibalisation PE Band Chart
towards the other brands’ market shares. Due to this, BAT’s VFM market
share grew by a 4.6%-pts in the 3Q. We believe that moving forward, Peter
will be able to drive the segment to regain BAT’s VFM market share of
~45% back in 2008. Besides the down-trading market, we believe Peter’s
strong performance was also attributed to the fact that Peter used to be a PER = 19x
premium brand before it was merged with Kent. Now as a VFM, we believe PER = 17x
smokers have the perception that it is still a premium brand, only priced at PER = 15x

VFM levels.
♦ Moving forward. The recent excise duty hike of 3 sen would definitely
affect TIV from 4Q onwards, given that illicit market is now more rampant
than ever, accounting for an estimated 39.7% of the overall market which Relative Performance To FBM KLCI
roughly translates to 4 out of 10 packs. We are slightly comforted though as
the hike caused cigarette prices to be at RM10 which we believe provides,
to a certain extent, convenience for smokers, i.e. no change required. FBM KLCI
However, the price could yet again be increased if the proposal of 0.5
sen/stick cess is implemented by the Government. Assuming BAT fully
passes on the cess to customers without any increase in sales tax, a price BAT
of 20’s would cost RM10.10. This removes the element of convenience
mentioned before. Although, management mentioned that they still had not
received any formal notification on the matter.
♦ Risks. Key risks: 1) more Government campaigns to discourage smoking
e.g. a potential ban on smoking in public areas; and 2) increasing illicit
cigarettes market.
♦ Forecasts. We have revised our FY11-12 earnings forecast up by 0.5-0.7%
after increasing our VFM market share assumptions to 42-44% (from 37%). Hoe Lee Leng
♦ Investment case. After the earnings revision, our fair value is raised to (603) 92802641
RM42.92 (from RM42.90 previously) based on unchanged WACC of 7.6%. hoe.lee.leng@rhb.com.my
Maintain Underperform.

Please read important disclosures at the end of this report. Page 1 of 4

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21 October 2010

Table 2. Earnings Review

QoQ YoY YoY


FYE Dec (RMm) 3Q09 2Q10 3Q10 (%) (%) 9M10 9M10 (%) Comments
Revenue 919.2 993.9 993.6 (0.0) 8.1 2,902.5 3,006.3 3.6 Yoy growth due to higher
excise, pricing and
increased volumes.

EBIT 241.7 256.9 229.5 (10.7) (5.0) 797.8 751.2 (5.8) Refer to EBIT margin
Finance cost (7.2) (6.8) (6.9) 1.1 (3.8) (20.3) (20.5) 0.7
PBT 234.5 250.0 222.6 (11.0) (5.1) 777.4 730.8 (6.0) Filtered down from EBIT and
higher interest charges.
Taxation (67.8) (64.2) (51.9) (19.1) (23.4) (203.5) (182.4) (10.4)
Net profit 166.7 185.8 170.7 (8.2) 2.4 573.9 548.4 (4.4) Filtered down from PBT and
higher effective tax rate

EPS (sen) 58.4 65.1 59.8 (3.1) (4.7) 201.0 192.1 (4.4)
Dividend - net (sen) 61.0 113.0 64.0 (43.4) 4.9 174.0 177.0 1.7 The company informed that
they will not gear up to pay
out higher dividends and will
maintain its current dividend
policy of a 90% payout.

EBIT margin (%) 26.3% 25.8% 23.1% (0.2) (2.5) 27.5% 25.0% (2.5) Operating margin dropped
as a result of unfavourable
product mix after the ban on
less than 20’s pack
PBT margin (%) 25.5% 25.2% 22.4% (0.2) (2.5) 26.8% 24.3% (2.5)
Net profit margin 18.1% 18.7% 17.2% (0.1) (1.9) 19.8% 18.2% (1.5)
(%)
Effective tax rate 28.9% 25.7% 23.3% 0.0 0.2 26.2% 25.0% (1.2)
(%)
Other information
- Shipment vol (bn 3.2 3.4 3.7 11.6% 16.1% 10.1 10.7 5.3% YTD TIV grew yoy on
sticks) improved economic
conditions and trade
speculation in anticipation of
the excise-led price
increase.
- BAT's sales vol (bn 2.1 2.2 2.3 1.4% 7.1% 6.7 6.7 1.2% Volume grew slower than
sticks) TIV as BAT did not benefit
much from the pre-excise
hike trade speculation.
- BAT's market share 58.9 60.4 60.2 -0.2%pt 1.3%pt 59.5 60.2 0.7%pt Overall YTD market share
(%) improved driven mainly by
the strong growth of Peter
Stuyvesant, which is offset
by the decline in premium
volumes as a result of the
removal of Dunhill 14’s
- Share of premium 72.6 74.1 72.1 -2.0%pt -0.5%pt 73.3 72.1 -1.2%pt Declined due to the removal
brand (%) of Dunhill 14’s and weaker
sales of Benson & Hedges
- Share of value 36.9 36.1 41.7 5.6%pt 4.8%pt 36.5 41.7 5.2%pt Improved strongly driven by
brand (%) Peter Stuyvesant which
achieved a 2.6% market
share after four months of it
being launched.
- Dunhill's Retail 43.4 43.9 43.5 -0.4%pt 0.1%pt 43.4 43.5 0.1%pt Improved driven by growth
Audit Share (%) in Blue (0.4%-pt) and Green
(0.6%pt). Dunhill achieved
a 98% share retention after
the ban on less than 20’s
pack.
- Kent’s Retail Audit 2.9 2.8 2.8 0.0%pt -0.1%pt 2.9 2.8 -0.1%pt Dipped slightly after the
Share (%) introduction of Peter
Stuyvesant.
- Pall Mall's Retail 7.8 7.9 7.8 -0.1%pt 0.0%pt 7.8 7.8 0.0%pt Dipped slightly after the
Audit share (%) introduction of Peter
Stuyvesant.

Source: Company, RHBRI

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Table 3. Earnings Forecasts Table 5. Forecast Assumptions
FYE Dec FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F
(RMm)
Turnover 3,923.4 4,038.8 4,094.8 4,117.7 TIV Total (bn sticks) 13.0 12.2 12.2
Turnover (5.1) 2.9 1.4 0.6 TIV Premium (%) 70.0% 70.0% 70.0%
growth (%)
TIV VFM (%) 22.0% 22.0% 22.0%
Cost of Sales (2,379.0) (2,467.4) (2,572.8) (2,590.7)
Gross Profit 1,544.4 1,571.4 1,522.1 1,527.0 BAT's market share
Gross Margin 39.4 38.9 37.2 37.1 Premium (%) 74.0% 74.0% 74.0%
(%)
VFM (%) 37.0% 42.0% 44.0%
EBITDA 1,104.6 1,047.4 990.8 992.7

Depreciation (71.4) (70.9) (84.4) (83.3)


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

Pretax 1,005.3 963.2 893.0 882.6


Profit
Tax (258.5) (240.8) (223.3) (220.6)
Net Profit 746.8 722.4 669.8 661.9
Source: Company data, RHBRI estimates

Chart 1: BAT Technical View Point


♦ The share price of BAT has always been trading at
above the long-term uptrend Line (UTL).

♦ After stabilising at above the RM40.20 level in


2009, the stock began to move higher again in Mar
2010.

♦ The upswing intensified in Aug when the buying


momentum increased, lifting the share price higher
towards the RM46.30 immediate resistance level.

♦ After removing the RM46.30 level, the stock formed


a higher base at above the resistance-turn-support
level and propelled to a high of RM49.94 in Oct.

♦ Although it has shown some weakness on the chart


in the recent sessions, the stock remains firmly
supported at above the RM46.30 level and the 40-
day SMA near RM47.26.

♦ The stock will stay bullish bias at above RM46.30


and holds a chance to chalk up fresh historical high
if it removes RM49.94 level hit in Oct soon.

♦ For a longer-term view, its long-term uptrend will


stay intact even if it were to retreat towards the
UTL near RM41.70 and the RM40.20 level.

♦ Worries only appear if it breaches those supports,


in our view, if it occurs, it marks a derailment of
the long-term uptrend.

Page 3 of 4

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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.

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