PP 7767/09/2010(025354)

Corporate Highlights
Malaysia
RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
N ew s Updat e Company No: 233327 -M

4 October 2010
MARKET DATELINE

British American Tobacco Share Price

Fair Value
:
:
RM48.40
RM41.55
Surprise Cigarette Price Hike 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 16.7 - 1.8 1.1 168.5 5.4
2010f 3,979.3 713.5 249.9 -4.5 19.4 255.0 1.1 0.8 148.0 4.5
2011f 3,800.7 697.0 244.1 -2.3 19.8 258.0 0.7 0.8 124.6 4.5
2012f 3,794.8 745.2 261.0 6.9 18.5 265.0 0.5 0.3 118.0 4.9
Main Board Listing / Trustee Stock / non-Syariah-Approved Stock By The SC * Consensus based on IBES Estimates

♦ Premium 20-stick pack now RM10. Cigarette prices today were raised to Issued Capital (m shares) 285.5
RM10 per pack for the premium pack and RM8.50 for the VFM pack, an Market Cap (RMm) 13,818.2
increase of 3.5 sen/stick. This effectively raises the prices by 7.5-9% from Daily Trading Vol (m shs) 0.1
RM9.30 and RM7.80 previously for the premium and VFM pack respectively. 52wk Price Range (RM) 44.1-47.0
This increase was unexpected in terms of quantum and timing. We had
Major Shareholders: (%)
previously anticipated a slight increase in excise duty of ~5% per stick
BAT Holdings (M) BV 50.0
(increasing cigarette prices to RM9.50 per pack for the premium), to be
Amanah Raya 9.0
tabled at the upcoming Budget 2011.
FYE Dec FY10 FY11 FY12
♦ Is it duty or is it cess? Or both? We understand that there is no clear EPS chg (%) 1.0 3.1 10.1
indication of the reason for the increase. The increase in prices could be a Var to Cons (%) -2.0 -5.4 -1.5
combination of an expectation in the duty hike combined with the cess that
the tobacco companies have to pay. As highlighted previously, the National PE Band Chart
Kenaf and Tobacco Board (NKTB) announced recently that cigarette
manufacturers will have to pay a cess of 0.5 sen per stick. Assuming the
above scenario, the increase of 3.5 sen per stick would indicate a ~2 sen
rise in duty and a 0.5 sen cess. We will obtain a clearer picture after further
PER = 19x
discussions with management. For the moment we are not increasing our PER = 17x
excise duty assumptions. PER = 15x

♦ TIV to drop. We estimate that TIV will decline as a result of the higher
prices (Table 2). We are estimating that the price increase will cause FY10
TIV to drop by an additional 1%-pts to -4.5% (from our original Relative Performance To FBM KLCI
assumptions of -3.5%), while FY11 TIV would drop by an additional 5%-pts
to -6% (from our original assumptions of a 1% decline), thus increasing our FBM KLCI
forecast for BAT’s FY10 earnings by 1% and FY11 earnings by 3.1%. Our
estimates are based on an assumption that there is no excise duty hike. BAT

Should there be an excise duty hike in the region of 2 sen/stick announced

during the Budget, this would cause a reduction in earnings.

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

smoking like a potential ban on public smoking may result in turning
potential new smokers away; and 2) increasing illicit cigarettes market.

♦ Forecasts. Our FY10-12 earnings forecasts are increased by 1-10%.

♦ Investment case. We believe the increase in prices is in anticipation by

the tobacco players of an increase in excise duty and possibly an
introduction of a cess. Assuming that is the case, we believe BAT’s outlook
for FY11 onwards remains cloudy, underpinned by a decline in TIV as
smokers switch to alternatives i.e. illicit/smuggled cigarettes. Maintain Hoe Lee Leng
Underperform with a revised DCF-derived fair value of RM41.55 (from (603) 92802641
RM40.25 previously). hoe.lee.leng@rhb.com.my

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 4 October 2010

Table 2. Impact to earnings

TIV Chg in FY11 earnings
(%) (%)
-3 7.9
-4 7.0
-5 6.0
-6 5.0
-7 4.1
-8 3.1
Source: RHBRI Estimates

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

FYE Dec FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F
(RMm)
Turnover 3,923.4 3,979.3 3,800.7 3,794.8 TIV Total (bn sticks) 13.0 12.0 11.4
Turnover (5.1) 1.4 (4.5) (0.2) TIV Premium (%) 70.0% 70.0% 70.0%
growth (%)
TIV VFM (%) 22.0% 22.0% 22.0%
Cost of Sales (2,379.0) (2,487.3) (2,337.2) (2,254.1)
Gross Profit 1,544.4 1,492.0 1,463.4 1,540.7 BAT's market share
Gross Margin 39.4 37.5 38.5 40.6 Premium (%) 74.0% 74.0% 74.0%
(%)
VFM (%) 36.5% 37.0% 37.0%
EBITDA 1,104.6 1,040.1 1,032.1 1,110.0

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 1,005.3 951.3 929.3 993.6

Profit
Tax (258.5) (237.8) (232.3) (248.4)
Net Profit 746.8 713.5 697.0 745.2
Source: Company data, RHBRI estimates
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
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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.

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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.

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securities, subject to the duties of confidentiality, will be made available upon request.

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actions of third parties in this respect.

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