Parvez M Chowdhury Analyst: Pharmaceuticals and Consumer Goods

Transcription

1 Parvez M Chowdhury Analyst: Pharmaceuticals and Consumer Goods parvez@bracepl.com British American Tobacco Bangladesh DSE: BATBC; Bloomberg: BATBC:BD Rating: OUTPERFORM January 20, 2010 Company Summary 52-week Price Range (BDT) Current Price BDT month Target Price BDT Total Return 26% Number of Shares mn 60.0 Market Cap BDT mn 39,042.0 BDT mn 2009A 2010E 2011E Revenue 17,576 20,815 23,811 Ops Income 2,908 3,911 4,428 Net Income 2,069 2,769 3,133 Q3 Performance Update Investment Positives British American Tobacco Bangladesh Company Limited (BATBC) is one of the most consistently performing consumer cyclical companies in Bangladesh. The company has been conducting business in the country for over 100 years and is one of the oldest listed companies on the Dhaka Stock Exchange. In the last six years, the company has managed to achieve 28% return on equity on average with 43% each in 2008 and Margins Gross Margin 35% 37% 37% Operating Margin 17% 19% 19% Net Margin 12% 13% 13% Growth Revenue Growth 25% 21% 16% Net Income Growth 24% 34% 13% Per Share EPS Dividend Book Value/Share The company was also able to maintain its margins (although narrow) year after year except two consecutive years in when cost of production went up because of high input prices. BATBC has a debt-to-equity ratio of 0% thanks to the insignificant debt. The company is cash rich, which helped it finance its capex internally as well maintain a high payout ratio. BATBC is one of the highest dividend paying companies in Bangladesh with a dividend yield of nearly 4% in Although maintaining this rate would be difficult, BATBC has shown a discipline of dividend payment in the past. Cashflow BDT mn Operating 2,563 3,199 3,671 Capex ,825 Dividend 1,440 1,800 2,354 Valuation P/E 18.87x 14.10x 12.46x P/B 7.56x 7.00x 6.46x ROE 43% 52% 54% Miscellaneous BDT mn Total Debt Cash 2,000 1,020 1,432 Debt/Equity 0% 0% 0% 900 Price Performance - Last 12 Months 900, , , , , , , , , Volume, RHS Price, LHS We maintain our OUTPERFORM rating for BATBC. We also set a 12- month fair value of BDT 780. Our recommendation considers the superior cash-generating capacity of the company, good corporate governance, history of protecting minority shareholder rights and the company s current low valuation. Our recommendation is based on an estimated 2011 EPS of BDT and a conservatively estimated P/E multiple of 15x. With an estimated dividend yield of 6.0% in 2010, this target price implies an estimated total return of 25.9%. Performance Snapshot 2007A 2008A 2009A 2010E 2011E 2012E Net Turnover BDT mn 11,933 14,030 17,576 20,815 23,811 26,131 YoY Growth 8% 18% 25% 21% 16% 13% Operating Income BDT mn 1,302 2,290 2,908 3,911 4,428 4,879 Operating Margin 7% 11% 16% 17% 19% 19% Net Income BDT mn 799 1,669 2,069 2,769 3,133 3,450 P/E 48.9x 23.4x 18.9x 14.1x 12.5x 11.3x P/B 11.9x 8.6x 7.6x 7.0x 6.5x 5.9x Dividend/Share BDT Total Debt BDT mn Total Assets BDT mn 8,040 9,988 12,020 12,998 14,112 15,128 Debt/Asset 11% 0% 0% 0% 0% 0% Debt/Equity 32% 0% 0% 0% 0% 0%

2 Company Profile One of the oldest and largest manufacturing companies in Bangladesh with some world-renowned brands in its portfolio British American Tobacco Bangladesh Company (BATBC) Limited is a subsidiary of British American Tobacco, based in London, UK. Bangladesh is one of the 68 countries in which BAT has manufacturing plants. It is one of the oldest and largest multinational companies operating in Bangladesh. Based in Dhaka it has one cigarette factory in Dhaka and one leafprocessing factory in Kushtia. The company currently employs around 200 managers and 1000 employees. Listed both on the Dhaka and Chittagong stock exchanges, the company is majority owned (66%) by a subsidiary of its parent (Raleigh Investments). BATB started its journey as Imperial Tobacco Company limited in the then undivided India in After independence in 1971, Bangladesh Tobacco Company Limited (BTC) was incorporated as a private limited company. BTC has always been a part of BAT. In line with the global identity change, BTC was later named as British American Tobacco Bangladesh Company Limited (BATBC) in BATBC has one of the most efficient marketing and distribution network in the country. It has been quick to identify market trends and equally adept at responding to such trends. In response to threats of losing market share to low-value competitors, it has introduced various stand-in brands in the past. The brand portfolio of BATBC currently consists of Benson & Hedges, John Player Gold Leaf, Pall Mall, Capstan, Star, Scissors and Pilot. Competition Market leader in premium segment With sale of over BDT 55 billion in a market of approximately BDT 110 billion, BATBC is the largest cigarette manufacturer and marketer in the country. Tobacco is grown under contract farming and processed at the company s Kushtia center. All cigarette products are manufactured locally. BATBC also exports processed tobacco, which contribute about 3% of its total revenue. In total sales, BATBC is followed by the Dhaka Tobacco Company (DTC) of the Akij group with a total estimated sale of BDT 18 billion in BATBC has a wide range of cigarettes for different consumer segments, but until recently it had a near monopoly in the premium brand market. The Benson & Hedges brand is the value leader in premium segment. Akij group dominates in the low-price segment principally competing with the hand-rolled cigarette manufacturers. Recently Akij started manufacturing and marketing the world renowned Marlboro brand. It is expected that Akij would be able to make a dent at BATBC s monopoly in the high-value segment. However, that has not yet materialized. BATBC in the second half has been actively trying to increase its presence in the low-price segment. This could lead to a fierce competition in the segment. Anti-tobacco campaign and government response Although the government has a tough anti-tobacco stance, it enjoys hefty VAT and duty from BATBC and other cigarette manufacturers Bangladesh is one of the early signatories of the Framework Convention on Tobacco Control (FCTC). On theory, the government has a tough antitobacco stand. However, it cannot discount the very large VAT and duty payments that BATBC and other cigarette manufacturers make toward the national coffers. In 2009 alone, BATBC made total payments of about BDT 37.5 billion to the government. In the last few years, the government has legislated progressively onerous regulations for the tobacco industry, including increase in duties and a ban on any kind of promotional campaign. Due to two large increases in taxes, cigarette price has risen

3 between 55% and 70% in the last two years. Tobacco companies in Bangladesh are subject to two other challenges. First, import of cigarette as a contraband item that deprives the legitimate manufacturer. Second, a government restriction on the expansion of tobacco cultivation land, which inflates the tobacco prices. Restricted from advertising or campaigning directly, BATBC uses other methods to put its name known, usually under corporate social responsibility activities. The company has been awarded many prizes, including a few national prizes, for assisting the country s forestation program. Effect on growth Government s anti-tobacco stance may hinder growth; however, the effect should be some years away Despite various challenges, BATBC has been growing its revenue by over 13% CAGR for the last six years. While most of this growth was achieved by an increase in cigarette prices followed by higher tax rates, BATBC managed to achieve real sales growth as well. They increased their number of cigarettes sold by more than 6% CAGR in the last six years. This can be explained by a young demography in the country who continue to smoke until mature age, and relatively cheap cigarette prices. There is no doubt that the government regulations and the anti-smoking campaigns would slow down the consumption of tobacco. However, it might take a few years, maybe even a decade, before such effects are visible by a declining cigarette sale. Performance so far this year Aggressive marketing and distributing program as well as higher depreciation lowered operating margin in Q3 BATBC has continued to perform consistently in line with its performance in the last couple of years. However, there is a significant drop in operating margin in 3Q10. The operating margin decreased to 16% compared to 23% in the same period in the previous fiscal. This was a combined result of increase in depreciation expense and an aggressive marketing and distributing program. The company increased its asset base in the property, plant and equipment. Moreover, the company is attempting to penetrate the lower value segment where their presence is not very prominent. This required a large marketing campaign for BATBC increasing the operating expenses. This in turn also impacted in the net margin, which went down to 10% compared to 13%. Table 1: Comparative quarterly performance 2009A 2010E 1Q09A 1Q10A 2Q09A 2Q10A 3Q09A 3Q10A 4Q09A 4Q10E 9M09A 9M10A Gross Turnover 55,075 66,503 12,634 15,742 13,127 18,014 13,772 14,366 15,542 18,380 39,533 48,122 Supplementary Duty & VAT 37,498 45,687 8,822 10,946 9,135 12,343 9,151 9,739 10,390 12,660 27,108 33,027 % of Gross Turnover 68% 69% 70% 70% 70% 69% 66% 68% 67% 69% 69% 69% Net Turnover 17,576 20,815 3,812 4,797 3,992 5,671 4,621 4,627 5,152 5,721 12,425 15,095 Cost of Sales 11,464 13,114 2,411 2,906 2,593 3,867 2,928 2,837 3,533 3,504 7,931 9,609 Gross Profit 6,113 7,702 1,401 1,891 1,399 1,805 1,693 1,790 1,619 2,216 4,494 5,486 Gross Margin 35% 37% 37% 39% 35% 32% 37% 39% 31% 39% 36% 36% Operating Profit 2,908 3, ,355 1, ,552 3,094 Operating Margin 17% 19% 17% 21% 22% 24% 23% 16% 7% 14% 21% 21% Net Profit 2,069 2, ,637 2,011 Net Margin 12% 13% 11% 13% 15% 16% 13% 10% 8% 13% 13% 13%

4 Meeting with Management British American Tobacco Bangladesh Management is optimistic about the momentum of the company In our meeting with the BATBC management it was revealed that the company completed its plant asset expansion in 1Q10, which increased capacity by 25%, from 24 billion sticks to 30 billion sticks annually was remarkable for profitability because of two price increases. Currently all price increase is negotiated with the government. The government allowed a price increase after 15 years in The company was also allowed to increase price in the last quarter of 2010 in exchange of slightly higher supplementary duty and VAT. BATBC is also taking many small measures to reduce costs, such as reduction of wastage. BATBC currently holds 75% of the market share in value in the premium segment because of its leadership in the segment. The company expects to continue this position. BATBC is increasingly using local tobacco in its premium products, reducing dependence on imported high-quality leaves. Export of leaves is also increasing. Furthermore, if BATBC can consolidate its position in lower price segments, they will be able to improve their top line even more. The VAT and duty imposed on them has increased slightly to 69% from 68% on the gross turnover. Outlook Margins and profitability are expected to increase despite growing burden of supplementary duty and VAT BATBC is likely maintain the momentum in the market as the closest rival DTC has so far failed to make any considerable damage to BATBC s stronghold in premium segment. Moreover, BATBC is on the counter-attack by focusing more on lower price segment. If BATBC can indeed make a good foothold in the lower segment, it should help the top line and bottom line as well as margins. We expect that the revenue from the lower segment will enhance profitability from 4Q10 onwards. The supplementary duty and VAT is expected to gradually grow as high as 72% of gross turnover by 2015 as part of government s anti tobacco stance. Table 2: Future Outlook Indicators 2007A 2008A 2009A 2010E 2011E 2012E Earning Per Share (BDT) Dividend per share (BDT) Book Value Per Share Sales Growth 8% 18% 25% 21% 16% 13% Earning Growth 121% 109% 24% 34% 13% 10% Dividend Growth 133% 243% 25% 31% 13% 10% Dividend Yield 1% 4% 4% 6% 7% 7% Duty and VAT/Gross Turnover 68% 69% 68% 69% 69% 70% Gross Profit Margin 30% 36% 35% 37% 37% 37% Operating Margin 11% 16% 17% 19% 19% 19% Net Margin 7% 12% 12% 13% 13% 13% Return on Equity 27% 43% 43% 52% 54% 55% Return on Assets 11% 18% 19% 22% 23% 23% Liquidity Stocks are fairly liquid with about BDT 121 mn average daily turnover in the last 12 months Almost 66% of the shares of BATBC are held by its parent company. Another 22% is held by local institutions including ICB and Sadharan Bima, leaving close to 12% for the public float. However, ICB has been selling its shares and has reduced its holding from 24% in 2006 to 17% in Average daily trade for the last 12 months was about 200,000 shares or about BDT 121 million.

5 Valuation DCF and comparative valuations gave similar fair values. With our fair value of BDT 780 and dividend yield of 6.0%, 12-month return will be 25.9% Our DCF valuation gave us a fair value per share of BDT We considered a discount rate of 13.0% and a terminal growth rate of 5.0%. We have also used five consumer discretionary companies trading in the DSE for comparison purposes. The average P/E and P/B, respectively, of these companies are 22.5x and 8.2x. At a P/E multiple of 18.9x and a P/B of 7.6x, BATBC is trading at a discount to these companies. Using a P/E multiple of 15.0x on estimated 2011 EPS of BDT implies a 12-month fair value of BDT From our DCF and comparative valuation, we arrived at a fair value of BDT 780. With an estimated dividend yield of 6.0%, our fair price would provide a 12-month total return of 25.9%. Table 3: Discounted FCF BDT Operating cash mn 2,563 3,199 3,671 4,031 4,510 4,861 5,176 Capital expenditure mn , Change in debt mn 6 1,754 1,374 3,075 3,396 3,834 4,142 4,412 Net terminal value mn 57,928 Terminal Value mn 57,903 Terminal debt mn -25 Net free cash flow mn 1,754 1,374 3,075 3,396 3,834 4,142 62,340 Discount rate 13.0% Terminal growth rate 5.0% NPV (BDT mn) 47,114 NPV/Share Table 4: Comparative Valuation* Current Other consumer discretionary Price EPS P/E BVPS P/B BATA Shoe x x Apex Adelchi Footwear x x AMCL (PRAN) x x Reckitt Benckiser x x Marico Bangladesh x x Average 22.5x 8.2x Average (excluding anomalies) 20.7x 6.4x BATBC (2009) x x * All EPS and BVPS figures are from audited reports of latest fiscal year (2009) BATBC valuation EPS BV 2011 estimates Multiple 15.0x 7.0x Target price Target price Price return 19.87% Dividend yield 6.03% Total Return 25.90% Source: Company Data, DSE, BRAC EPL Research, January 2011

6 Table 5: Income Statement 2007A 2008A 2009A 2010E 2011E 2012E Net Turnover 11,933 14,030 17,576 20,815 23,811 26,131 Cost of Sales 8,389 8,999 11,464 13,114 15,001 16,462 Gross Profit 3,545 5,031 6,113 7,702 8,810 9,668 Operating Expenses 1,826 2,317 2,815 3,334 3,814 4,186 Depreciation Expenses Operating Profit 1,302 2,290 2,908 3,911 4,428 4,879 Other Income EBIT 1,302 2,290 2,908 3,911 4,428 4,879 Interest Expenses Profit before WPPF 1,256 2,367 2,941 3,937 4,454 4,904 Allocationn to WPPF EBT 1,256 2,248 2,794 3,740 4,231 4,659 Tax ,098 1,209 PAT 799 1,669 2,069 2,769 3,133 3,450 Table 6: Cash Flow Statement BDT mn 2007A 2008A 2009A 2010E 2011E 2012E Operating Activity Net Income 2,769 3,133 3,450 Add back non cash expense Change in working capital Cash Flow from operations 1,519 1,444 2,563 3,199 3,671 4,031 Investing Activity Capital Expenditure -1, Cash Flow from Investing , Financing Activity Dividend Paid -2,354-2,663-2,932 Cash flow from Financing ,426-2,354-2,663-2,932 Net cash Beginning Balance ,678 2,000 1,020 1,432 Cash in Hand 918 1,678 2,000 1,020 1,432 1,896

7 Table 7: Balance Sheet BDT mn 2007A 2008A 2009A 2010E 2011E 2012E Cash 918 1,678 2,000 1,020 1,432 1,896 Advance Tax 891 1,273 2,118 2,118 2,118 2,118 Trade debtors Inventory 2,245 2,719 3,578 4,092 4,681 5,138 Total Current Assets 4,342 6,526 8,211 7,820 8,905 9,891 Fixed Asset- at cost 6,586 6,834 7,473 9,298 9,894 10,529 Less: Accumulated Depreciation 2,887 3,371 3,663 4,120 4,688 5,292 Net Fixed Assets 3,698 3,463 3,809 5,178 5,207 5,237 Total Non Current Assets 3,698 3,463 3,809 5,178 5,207 5,237 Total Assets 8,040 9,988 12,020 12,998 14,112 15,128 Liabilities & Equities: Current Liabilities: Short term bank loan Sundry creditors 2,942 3,275 3,911 4,474 5,118 5,617 Proposed final dividend Provision for corporate tax 1,078 1,548 2,338 2,338 2,338 2,338 Total Current Libilities 4,020 4,822 6,249 6,812 7,456 7,955 Deferred Liability(gratuity) Deferred tax liability Obligation under finance lease Total Non Current liabilities Total Liabilities 4,755 5,455 6,857 7,420 8,064 8,563 Shareholder's Equity Paidup Capital Revenue reserve 2,620 3,869 4,497 4,913 5,383 5,900 Other reserve Total Equity 3,285 4,534 5,162 5,577 6,047 6,565 Total Liabilities & Equities 8,040 9,988 12,020 12,998 14,112 15,128

8 Table 8: Indicators and Ratios 2007A 2008A 2009A 2010E 2011E 2012E Dividend (BDT mn) 420 1,440 1,800 2,354 2,663 2,932 Retained Earnings (BDT mn) Payout ratio 53% 86% 87% 85% 85% 85% Per share figures Number of shares (mn) Earning Per Share (BDT) Dividend per share (BDT) Total Debt (BDT mn) Debt/Total Assets 0% 0% 0% 0% 0% 0% Debt/Total Equity 0% 0% 0% 0% 0% 0% Sales Growth 8% 18% 25% 21% 16% 13% Earning Growth 121% 109% 24% 34% 13% 10% Dividend Growth 133% 243% 25% 31% 13% 10% Dividend Yield 1% 4% 5% 6% 7% 8% Duty and VAT/Gross Turnover 68% 69% 68% 69% 69% 70% Cost of Sales/Sales 70% 64% 65% 63% 63% 63% Gross Profit Margin 30% 36% 35% 37% 37% 37% Operating CostsSales 15% 17% 16% 16% 16% 16% Operating Margin 11% 16% 17% 19% 19% 19% Net Margin 7% 12% 12% 13% 13% 13% Return on Equity 27% 43% 43% 52% 54% 55% Return on Assets 11% 18% 19% 22% 23% 23% Effective Tax Rate 36% 26% 26% 26% 26% 26% NC Working Capital Increase in NC Working Capital Book Value Per Share

9 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 Aminul Haque Head of Capital Markets amin@bracepl.com Md. Monirul Islam Research Analyst monirul@bracepl.com Parvez Morshed Chowdhury Research Analyst parvez@bracepl.com Ali Imam Investment Analyst imam@bracepl.com Asif Khan Investment Analyst asif@bracepl.com Md. Ashfaque Alam Research Associate ashfaque@bracepl.com Khandakar Safwan Saad Research Associate safwan@bracepl.com Aasim Tajwaar Matin Research Associate tajwaar.matin@bracepl.com BRAC EPL Research WW Tower (7 th Floor) 68 Motijheel C/A, Dhaka-1000 Tel: Fax: research@bracepl.com