valuation update british american tobacco bangladesh

Valuation Update on

British American Tobacco

Bangladesh Company Limited

DSE: BATBC; BLOOMBERG: BATBC: BD

Publication Date: 04 June 2020 (Thursday)

Analyst: Mohammad Asrarul Haque

[email protected]

Phone: +8802471129474 (Ext.: 351)

British American Tobacco Bangladesh Company Limited Valuation Update (June 2020) DSE: BATBC; BLOOMBERG: BATB:BD

Current Market Price: BDT 907.6

Updated Target Price: BDT 1,180.0

Upside Potential: 30%; Exp. Dividend Yield: 0.0%

Sector: Food & Allied

Page 1 of 31

This research report is a property of EBL Securities Ltd. | Bangladesh Equities | 04 June 2020 N.B.: Disclaimer of the EBL Securities Ltd, the author(s) certification and rating definition have been provided at the end of the report.

2018A 2019A 2020E 2021E

Financial Information (BDT mn):

Net Sales 54,640 56,821 58,974 71,173

EBITDA 21,482 19,357 18,492 29,508

EBIT 19,788 17,875 16,502 27,485

Profit After Tax 10,012 9,246 8,663 14,430

Total Assets 56,543 59,430 62,466 72,018

Total Debt 5,180 0 0 0

Total Equity 29,529 35,793 37,239 44,018

Retained Earnings 28,864 33,929 35,374 42,153

Cash 1,634 5,394 838 5,146

Dividend (C/B)% 500/200 400/0 425/0 700/0

Margin:

EBITDA 39.3% 34.1% 31.4% 41.5%

EBIT 36.2% 31.5% 28.0% 38.6%

Net Profit 18.3% 16.3% 14.7% 20.3%

Growth (YoY):

Net Sales 5.1% 4.0% 3.8% 20.7%

EBITDA 16.7% -9.7% -7.7% 66.6%

EBIT 16.5% -9.9% -4.5% 59.6%

Net Profit 27.9% -7.6% -6.3% 66.6%

Profitability:

ROAA 19.4% 15.9% 14.2% 21.5%

ROAE 38.0% 28.3% 23.7% 35.5%

Payout Ratio -34.8% 159.9% 13.4% -1.1%

Leverage:

Debt Ratio 9.2% 3.0% 0.0% 0.0%

Debt-Equity 17.5% 5.0% 0.0% 0.0%

Int. Cov. Ratio 41.8 37.9 0.0 0.0

Altman Z-Score 7.77 4.50 4.63 5.04

Valuation:

EPS (BDT) 55.6 51.4 48.1 80.2

NAVPS (BDT) 164.0 198.9 206.9 244.5

P/E (x) 21.2 18.9 24.5 14.7

P/NAV (x) 7.2 4.9 5.7 4.8

EV/EBITDA 9.9 8.8 10.9 6.7

EV/Sales 3.9 3.0 3.4 2.8

Price/Sales 3.9 3.1 3.6 3.0

*SOURCE; BATBC DISCLOSURES & EBLSL RESEARCH ** KEY TERMINOLOGIES ARE PRESENTED AT THE END OF THE REPORT

Sector Food & Allied

Sub-Sector Tobacco

Rating Validity December 2020

Potential Upside 30.0%

52W High-Low 821.6-1,439.2

Market Cap (BDT mn) 163, 368

# of Shares 108.0 mn

BATBC’s actual 2019 results were in line with our earlier estimates with minor deviations. Higher VAT, SD and surcharges driven by greater volume contribution from higher segments along with higher COGS of the respective segment sales led to lower actual EBIT and EBITDA against our expectation. However, error between expected and actual values of net profit was lower, thanks to the lower tax provision kept by the company during the year. Meanwhile, BATBC declared higher dividend compared to our expectation as they prefer higher payout at times of low capex requirement.

Indicators (in mn)

2018A 2019E 2019A Deviation

Volume Sales 51,425 48,706 50,813 4.33%

Gross Revenue 233,118 263,979 269,855 2.23%

VAT,SD & HDSC 178,478 205,760 213,033 3.53%

Net Revenue 54,640 58,219 56,821 -2.40%

EBIT 19,788 20,310 17,875 -11.99%

EBITDA 21,482 22,131 19,357 -12.53%

Net Income 10,012 9,892 9,246 -6.53%

Restated EPS 56 55 51 -6.53%

DPS 50* 35 40 14.29%

Our June 2020 target price published on October 2019 fall short of our expectation as broad market significantly underperformed during that period driven by a number of factors including low market liquidity, fear of economic fallout after newly emerged COVID-19 pandemic etc.. However, we have updated our valuation model based on recent disclosures, assessing the COVID-19 impact on BATBC, macro-economic and industry outlook. We are retaining our ‘Overweight’ rating on BATBC with December 2020 target price of BDT 1 180.0 per share. Our target price will yield a potential capital gain of 30% over the current market price of BATBC.

Key Catalyst

Price-led revenue growth despite volume drop.

Continued production during country wide semi-locked down period.

Commencement of export along with production capacity enhancement of cigarettes to drive future growth.

Waiver of export duty on export of tobacco and related products

Low price elasticity of high segment cigarettes.

Risk Factor

Risk of COVID-19 special tax on tobacco products to reduce government budget deficit can affect projected growth and profitability.

COVID-19 pandemic and post-pandemic situation might result in lower expenditure on tobacco related products by consumer and resultantly lower than expected earnings.

Growing competition from illegal and smuggled cigarette brands, competition from international and small players without maintaining proper compliance.

Risk of retail price hike in upcoming national budget announcement

mailto:[email protected]

EQUITY RESEARCH British American Tobacco Company Bangladesh Ltd. (DSE: BATBC; BLOOMBERG: BATB)

Page 2 of 31


SYNOPSIS British American Tobacco Company Limited is a part of the BAT PLC. BAT is one of the world’s leading consumer goods company, with nicotine and tobacco brands sold in over 200 markets around the world. The year 2019 was a challenging year for the British American Tobacco Company Limited. The company’s net domestic Cigarette revenues increased only marginally by around 1%, with growth primarily driven by pricing and mix improvement, albeit mostly offset by the low segment volume decline. Mixed business performance was observed driven by regulatory changes in retail price structure. Significant decline in low segment volume sales and resultant significant drop in net profit was partially offset by price driven revenue growth mostly from top three segment cigarettes sales in second half of the year. The year 2019 marked the introduction of “Royals” brand in Bangladesh, which was launched as a strategic move to the competitor activity and one that has been instrumental in driving the Company’s business forward, especially during the second half of the year.

A relevant and differentiated brand portfolio with range of products that cover all segments from low to premium that is sufficient to meet diverse set of consumer choices helped BATBC to retain leadership position in the market. With its integrated value chain that spans from ‘crop to consumers’ enables high levels of operational and quality control. BATBC does not own tobacco farms, but it provides agronomy support through extensive services. The Company’s Leaf function starts with around 38,000 registered farmers within the village community, according to its annual report.

Over the last few years, tobacco industry has witnessed major influx of illegal cigarettes in Bangladesh market. Tobacco regulation in Bangladesh attempts to reduce tobacco consumption through price hikes. Meanwhile, the sector is economically impactful and remained as one of the key sources of spawning government revenue to meet national budget deficit by raising retail prices each year. Eventually, the business context of the company remained extremely challenging. Meanwhile, BATBC has scaled up its manufacturing capacity and increased its machine efficiency over the last couple of years to cater to the growing demand from diverse consumer groups.

The year 2019 was a challenging year for BATBC. Mixed business performance was observed driven by regulatory changes in retail price structure.


Page 3 of 31


Table of Contents

Synopsis

1.0 Investment Thesis 04

1.1 Valuation 04

1.2 Changes in Valuation Assumptions/ Inputs 06

2.0 Analysis on the Recent Financial and Operational Performance 09

3.0 Historical Performance Review of the Key Financials 13

4.0 Company Fundamental Review & Analysis 16

4.1 Shareholding Structure 16

4.2 Corporate Governance Assessment 18

4.3 Business overview- Key products offerings 19

4.4 Business overview- Raw-materials sourcing 19

5.0 Bangladesh Tobacco Industry Insights 20

6.0 Historical & Projected Financial Statements 27

7.0 Historical & Projected Financial Indicators 30


Page 4 of 31


1.0 Investment Thesis 1.1 VALUATION Undervalued based on both the DCF and Relative Valuation Matrices

At current market price of BDT 907.6 per share, BATBC’s shares have a P/E multiple of 17.67 for its 2019 audited earnings as on 25 March 2020. Taking in consideration of a number of valuation multiples/ methods our target price for BATBC stands at BDT1,180.0 per share.

Valuation Summary

Valuation Methods Estimated Value

Discounted Cash Flow (FCFF)- Fair value 1,310.0 Residual Income Model 1,166.9 Dividend Discount Model approach 1,273.5 Selected FMCG Companies’ Avg. PE 895.2 Selected FMCG Companies’ Avg. PB 1,397.9 His. Earnings, Cash Flows & Book value based valuation 1,315.2 Enterprise value based valuation 911.9 Average Exp. Value Per Share 1,181.5

Current Price 907.60 December 2020 Target Price 1,180.00

Expected Capital Gain 30.01% Expected Dividend Yield 0.00%

Expected Total Return 30.0%

Discounted Cash Flow Valuation: We have updated our DCF based valuation of BAT Bangladesh by forecasting Free Cash Flows up to 2024. To derive the intrinsic value of BAT Bangladesh, we estimated terminal value at the end of 2024 using Constant Growth Cash flow Method. Ongoing COVID-19 pandemic has led us to make upside revision on our discount rate for unpredictability. Our DCF analysis with a discount rate of 11.47% and a reduced terminal growth rate of 3.5% (considering slow industry growth) gives us Enterprise Value of BDT 230, 413 million using the constant FCFF growth model. The DCF based fair value using Constant Growth Cash Flow method stands at BDT 1,310.0 per share for the company.

(Figures in BDT million) 2020E 2021E 2022E 2023E 2024E Terminal

DCF Valuation Based on Terminal Cash Flows

Profit for the Year 8,663 14,430 18,560 21,546 26,218 Add: After Tax Interest Expenses 0 0 0 0 0 Add: Depreciation & Amortization 1,990 2,022 1,990 1,934 1,873 Less: Investment in NWC 8,081 3,486 719 594 5,751 Less: Capital Expenditures 1,500 1,500 1,500 1,500 1,500 Free Cash Flow to the Firm 1,072 11,466 18,332 21,386 20,839 270,719 Discount Factor 1.0000 0.8971 0.8048 0.7220 0.6478 0.6478 Present Value Adjusted Free Cash flow to the Firm 1,072 10,286 14,754 15,442 13,499 175,360 Enterprise Value 230413 Plus: Cash & cash equivalent 5,394 Less: Interest bearing debt - Equity Value 235,807 No. of Share Outstanding 180 Value per Share (BDT) 1,310.0


Page 5 of 31


We have also checked the sensitivity analysis of DCF value per share on various discount rates and terminal growth rates and terminal EV/EBITDA multiple.

Sensitivity Analysis- Constant Growth Model Discount Rates

Term

inal

FC

F

Gro

wth

1,310.0 10.0% 11.0% 11.3% 11.5% 12.0% 12.3% 12.5% 13.0% 2.00% 1,355 1,203 1,171 1,142 1,083 1,056 1,031 984 2.50% 1,427 1,259 1,223 1,191 1,126 1,097 1,070 1,019 2.75% 1,467 1,289 1,251 1,217 1,149 1,119 1,090 1,037 3.50% 1,605 1,392 1,347 1,307 1,228 1,193 1,160 1,099 4.00% 1,717 1,472 1,422 1,377 1,289 1,250 1,213 1,146 5.00% 2,007 1,674 1,607 1,549 1,436 1,387 1,341 1,257

Relative Valuation: BAT Bangladesh Ltd. is the only listed tobacco manufacturing company in the capital market of Bangladesh. Hence, we tried to compare the performance of BATBC based on its historical average P(x) multiple.

Earnings Based Valuation Comparable (Time series analysis):

(In BDT million*) 2013 2014 2015 2016 2017 2018 2019 Median

(2013-19)

A. Total assets 18,464 27,075 29,591 35,348 46,415 56,543 59,430

Asset growth 22.81% 46.64% 9.29% 19.45% 31.31% 21.82% 5.11% 21.82%

B. Gross revenue 109,582 126,725 143,712 165,634 204,140 233,118 269,855

Gross revenue growth 21.52% 15.64% 13.40% 15.25% 23.25% 14.20% 15.76% 15.64%

C. Net revenue 31,225 35,562 39,895 43,754 51,964 54,640 56,821

Net revenue growth 13.67% 13.89% 12.18% 9.67% 18.76% 5.15% 3.99% 12.18%

D. EBITDA 9,961 12,003 13,563 14,483 18,447 21,482 19,177

EBITDA growth 34.36% 20.50% 13.00% 6.78% 27.37% 16.45% -10.73% 16.45%

E. EBIT 9,192 11,054 12,602 13,221 16,951 19,788 17,875

EBIT growth 37.49% 20.25% 14.00% 4.91% 28.22% 16.74% -9.67% 16.74%

F. Net cash flow from operating activities 6,024 4,765 9,101 4,235 9,733 9,008 15,589

Cash flow growth 12.42% -20.91% 91.01% -53.47% 129.85% -7.46% 73.07% 12.42%

G. Book value of equity 8,902 11,464 14,610 18,883 23,112 29,529 35,793

H. Enterprise value (EV) 93,829 159,243 179,110 152,526 200,505 213,076 170,848

I. Net profit after tax 4,924 6,282 5,874 7,582 7,830 10,012 9,246

J. No of shares outstanding 60 60 60 60 60 60 180

K. Price per share 1,603.1 2,650.3 2,950.5 2,483.0 3,401.6 3,541.7 969.9

Valuation Ratios: Median

(2013-19)

Price to gross revenue 0.88 1.25 1.23 0.90 1.00 0.91 0.65 0.91

Price to net revenue 3.08 4.47 4.44 3.40 3.93 3.89 3.07 3.89

Price to cash flows 15.97 33.38 19.45 35.18 20.97 23.59 11.20 20.97

Price- earnings 19.53 25.31 30.14 19.65 26.07 21.22 18.88 21.22

Price- book value 10.81 13.87 12.12 7.89 8.83 7.20 4.88 8.83

EV/ EBIT 10.21 14.41 14.21 11.54 11.83 10.77 9.56 11.54

EV/ EBITDA 9.42 13.27 13.21 10.53 10.87 9.92 8.91 10.53

* All values are in BDT million except no of shares, growth rates & valuation multiples

Earnings & Book Value Based Valuation:

A. Historical Average Multiples(x) B. Values 2019 (BDT mn) C. Per Share @180 mn Shares

D. Price Per Share (A x C)

Price to gross revenue 0.91 Gross revenue 248,600 1,381.1 1,259.0

Price to net revenue 3.89 Net revenue 58,974 327.6 1,274.2

Price to cash flows 20.97 Cash Flows 10,253 57.0 1,194.4

Price to earnings 21.22 NPAT 8,663 48.13 1,021.5

Price to book value 8.83 Book Value 37,239 206.88 1,826.9

Average Value Per Share 1,315.2


Page 6 of 31


Valuation based on Enterprise Value of the company

Based on historical Enterprise Value multiple EV/EBIT EV/ EBITDA

Multiple 9.56 8.83

Bases (EBIT or EBITDA)- Est. 2020 16,501.60 18,491.83

Enterprise Value 157,718.67 163,212.32

Plus: Cash & cash equivalent 3,684.49 3,684.49

Less: Interest Debt - -

Equity Value 161,403.15 166,896.80

Value Per Share 896.68 927.20

911.94

Valuation based on Selected FMCG Comparable Stocks Listed in DSE

Annualized EPS Latest NAVPS Market Price Forward P/E Forward P/B

Marico 84.01 44.05 1562.5 18.60 35.47

GlaxoSmithKline 59.88 147.12 2046.3 34.17 13.91

Berger Paints 46.63 186.15 1308.6 28.07 7.03

Olympic Industries Ltd. 10.52 36.35 150.2 14.28 4.13

Golden Harvest 2.04 21.03 16.7 8.19 0.79

Median 18.60 7.03

BATBC Exp EPS-2020 48.13

BATBC NAVPS (2019 Audited) 198.85

BATBC Exp. Value Per Share 895.2 1,397.9

BATBC appears to be fairly valued at current market price based on relative valuation methodologies calculated over 2019 audited financial results and historical valuation multiples.

1.2 Changes in Our Valuation Assumptions/ Inputs Based on prevailing industry perspective and price structure along with our moderate price expectation, we have initiated some changes to our earlier projections. However, future projection is subject to enormous regulatory unpredictability. We tried to make a best possible forecast of BATBC’s financials based on available historical data, present industry insights and our own market observation.

Global pandemic unleashed by covid-19 will have significant downside impact on the revenue of the company The long-term economic impact due to the global pandemic unleashed by covid-19 is already thought to have tipped the world into recession. The first case of covid-19 attack in Bangladesh was reported on 08 March 2020. As the infection cases were going up, the government of Bangladesh declared country-wide national holidays on 25th March which was extended for six times and finally the government has decided to reopen from 31st May 2020 with some additional safety instructions. However, tobacco manufactures were allowed to continue production in their factories amidst the shut-down as the sector remained one of the major revenue sources of the government. However, based on our observation and media reports, we can infer that, the semi form of locked-down has significantly reduced tobacco consumption in Bangladesh due to increased health awareness and distribution problem and will affect the financial performance of the company as well.

The semi form of locked-down has significantly reduced tobacco consumption in Bangladesh due to increased health awareness and distribution problem


Page 7 of 31


Key Financial Forecast (2020 to 2024)

Revenue: Country-wide semi form of lock-down since the end of March will drastically impact earnings of the company. Meanwhile, sales is expected to remain shaky throughout the whole year (2020) from second quarter owing to increased health awareness. Top three segment will be mostly affected. However, we assumed that situation will be under control within 2020 and BATBC will enjoy normal earnings in 2021 onwards. Export contribution is also expected to increase. Meanwhile, entry of Japan tobacco by acquiring local “Dhaka Tobacco’ from Akij Group also posing added challenges to BATBC for retaining its market share.

Year 2016A Year 2017A Year 2018A Year 2019A Year 2020E Year 2021E Year 2022E Year 2023E Year 2024E

Volume Sales (Local) 48,340 53,204 51,425 50,744 40,438 43,347 41,177 42,854 46,957

Volume Sales (Export) - - - 69 198 3,665 7,765 11,144 16,521

Volume Sales (Total) 48,340 53,204 51,425 50,813 40,635 47,012 48,942 53,997 63,479

Gross Revenue 165,634 204,140 233,118 269,855 248,600 294,507 320,041 345,345 387,648

VAT,SD, HDSC & CD 121,880 152,176 178,478 213,033 189,625 223,334 237,243 251,133 274,480

Net Revenue 43,754 51,964 54,640 56,821 58,974 71,173 82,799 94,212 113,168

We expect that BATBC will continue to enjoy handsome growth in the years to come driven by increased contribution from export, steady volume growth in low and premium segments as well as increase in prices of cigarettes, though there remains significant uncertainty regarding potential tariff and tax structure changes by the government. However, expected growth in net profit might be much lower than that of gross revenue due to potential further increase in the supplementary duty, mostly in low priced segment. Overall revenue contribution from Medium & Higher segments might decline while contribution of sales revenue from export is expected to increase sizably.

Revenue Statement Year 2016 Year 2017 Year 2018 Year 2019 Year 2020E Year 2021E Year 2022E Year 2023E Year 2024E

Gross revenue from domestic sale

163,998

201,918

230,674

266,018

244,305

283,753

300,924

318,474

348,142

Supplementary duty and VAT

121,715

151,973

178,218

212,983

189,625

223,334

237,243

251,133

274,480

Revenue from domestic sale, net

42,283

49,945

52,456

53,036

54,679

60,419

63,682

67,341

73,661

Gross revenue from finished goods export

-

-

-

66

336

6,598

14,753

22,288

34,695

Export duty 0 0 0 0 0 0 0 0 0

Revenue from export of finished goods, net

42,283

49,945

52,456

53,102

55,016

67,017

78,434

89,629

108,356

Gross revenue from tobacco leaf export

1,636

2,222

2,444

3,770

3,959

4,156

4,364

4,583

4,812

Export duty 165 203 261 51 - - - - -

Revenue from leaf export, net

1,471

2,019

2,184

3,719

3,959

4,156

4,364

4,583

4,812

Total revenue from contracts with customers, net

43,754

51,964

54,640

56,821

58,974

71,173

82,799

94,212

113,168

Cost of manufacturing & gross profit: Previously, strong volume growth and economics of scale contributed to the lower increase in per unit manufacturing/ production cost. Per unit production cost (cost of goods sold excluding depreciation expenses) in 2019 was 0.57 while in the preceding four years ranged within BDT 0.475 to BDT 0.504. However, due to changes in industry landscape, we expect that sluggish volume growth along with increased competition will result in higher cost of cigarette manufacturing in the years to come. Cost of manufacturing will be unusually high in 2020 due to COVID-19 impact, country-wide semi-form locked down, distorting raw-material sourcing and factory

Sales is expected to remain shaky throughout the 2020 (except Q1) due to COVID 19 pandemic while top three segment will be mostly affected

We expect that sluggish volume growth along with increased competition will result in higher cost of cigarette manufacturing


Page 8 of 31


operation with increased health and safety compliance activities.

We have made an upward revision of our earlier estimate of cigarette manufacturing cost per unit (excluding depreciation expenses) assuming the rate will increase exponentially each year. While changes in production cost is linked mostly to volume production rather than increase in total revenue, gross profit margin has witnessed continuous improvement over the past years and we expect the same improving scenario to continue.

Operating performance: Country-wide semi-form locked down due to COVID-19 pandemic and increased health awareness measures for retailers and distributors will increase operating expenses of the company to a great extent in the 2020. Moreover, analyzing the recent financials and observing the market scenario, we can infer that increased promotional campaign from BATBC is happening looking into Japan Tobacco’s entry in Bangladesh market at large scale. We expect that BATBC will increase its budget for marketing and selling of cigarettes in the new competitive landscape to retain and grow its market share. Hence, we made upward revision of OPEX (excluding depreciation) to sales ratio at 14% of net sales revenue.

Operating Performance Indicators

Year 2016A Year 2017A Year 2018A Year 2019A Year 2020E Year 2021E Year 2022E Year 2023E Year 2024E

OPEX* to Sales ratio 13.2% 13.1% 11.9% 13.8% 16.0% 14.0% 14.0% 14.0% 14.0%

EBITDA Margin 33.1% 35.5% 39.3% 33.8% 31.4% 41.5% 45.1% 45.6% 45.8%

EBITDA Growth 6.8% 27.4% 16.5% -10.7% -3.6% 59.6% 26.6% 15.1% 20.6%

EBIT Margin (OPM) 30.2% 32.6% 36.2% 31.5% 28.0% 38.6% 42.7% 43.6% 44.1%

EBIT Growth 4.9% 28.2% 16.7% -9.7% -7.7% 66.6% 28.6% 16.1% 21.7%

*OPEX excludes depreciation expenses; Source: EBLSL Research; Margins has been calculated over net revenue.

Dividend history and projections: Like most other MNC’s, BATBC has a history of handsome cash dividend disbursement. BATBC distributes its earnings to the shareholders in the form of cash dividend only. Though, it used to payout interim dividend along with its final dividends, since 2016, only final cash dividend is being distributed. Retention of earnings to finance large expansion project since 2016 might be a reason for suspension of distributing interim cash dividends.

Key Profitability Indicators

2013A 2014A 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E 2023E 2024E

Total Cash Dividend 620% 550% 550% 600% 600% 500% 400% 425% 700% 900% 1100% 1400%

Total Stock Dividend 0% 0% 0% 0% 0% 200% 0% 0% 0% 0% 0% 0%

Final Cash Dividend 520% 450% 550% 600% 600% 500% 400% 425% 700% 900% 1100% 1400%

Interim Cash dividend 100% 100% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

DPS 62.0 55.0 55.0 60.0 60.0 50.0 40.0 42.5 70.0 90.0 110.0 140.0

EPS 82.1 104.7 97.9 126.4 130.0 167.0 51.0 48.0 80.0 103.0 120.0 146.0

Payout Ratio 75.5% 52.5% 56.2% 47.5% 46.0% 30.0% 77.9% 88.3% 87.3% 87.3% 91.9% 96.1%

Dividend Yield (Based on YE price) 3.9% 2.1% 1.9% 2.4% 1.8% 1.4% 4.1% -/- -/- -/- -/- -/-

Source: BAT Bangladesh Annual Reports and EBLSL Research Estimates

We expect that BATBC will increase its budget for marketing and selling of cigarettes in the new competitive landscape to retain and grow its market share


Page 9 of 31


2.0 Analysis on the Recent Financial and Operational Performance

Changes in accounting policies and estimation

The Company applied IFRS 16 for the first time in 2019. The nature and effect of the changes as a result of the adoption of the new accounting standard is provided in Note 6T(i) of the reported audited financial statements of the company. Several other amendments and interpretations apply for the first time in 2019, but do not have an impact on the financial statements of the company. The company has not early adopted any standards, interpretations or amendments that have been issued, but are not yet effective. Adoption of IFRS 16 has some minor impact on cost of sales, operating expenses, net finance expenses, non-operating income and deferred tax expenses in income statement. Net profit of the company would be BDT 65.9 million higher without adoption of IFRS 16 in 2019. There were some adjustment in statement of financial position and cash flow statement as well.

BATB continues to maintain a healthy financial position in 2019 despite a number of challenges:

Adoption of IFRS 16 has some implication to the financial reporting. Non-current assets increased by 18%, primarily due to the inclusion of leased assets as per IFRS 16 accounting policy. Consequently, return on asset decreased due to decline of profit in 2019.

Non-current liabilities also increased due to compliance with IFRS 16 and cumulative deferred tax impact.

Paid-up capital increased due to disbursement of 200% bonus share in 2019.

Key Financial Highlights Particulars 2018 2019 YoY % of Sales % of Sales Q4,2018 Q4,2019 YoY % of Sales % of Sales (BDT mn) (BDT mn) Growth 2018 2019 (BDT mn) (BDT mn) Growth Q4,2018 Q4,2019

Gross Revenue 233,118 269,855 15.8% 63,095 75,494 19.7% Net Revenue 54,640 56,821 4.0% 100.0% 100.0% 13,550 16,215 19.7% 100.0% 100.0% Cost of Sales 27,096 29,973 10.6% 49.6% 52.7% 7,426 8,967 20.8% 54.8% 55.3% Gross Profit 27,543 26,849 -2.5% 50.4% 47.3% 6,124 7,248 18.4% 45.2% 44.7% Op. Expenses 6,724 8,082 20.2% 12.3% 14.2% 1,982 2,771 39.8% 14.6% 17.1% Op. Profit 20,820 18,767 -9.9% 38.1% 33.0% 4,142 4,477 8.1% 30.6% 27.6% PBT 19,314 17,404 -9.9% 35.3% 30.6% 3,899 4,198 7.7% 28.8% 25.9% NPAT 10,012 9,246 -7.6% 18.3% 16.3% 2,141 2,776 29.6% 15.8% 17.1% Res. EPS (BDT) 55.6 51.4 -7.6% 11.90 15.42 29.6% *Figures are in BDT million unless otherwise stated.

BATBC secured attractive gross revenue growth in 2019 driven by government led price hike, however, high topline taxation took away significant part of the revenue The Company witnessed 15.8% YoY growth in gross revenue while only 4.0% YoY growth in net revenue against 1.2% YoY de-growth in total volume sold by BATBC in 2019. Increase in gross revenue was primarily driven by mix improvement & large price increase in top three segments with effect from June 2019. BATBC experienced mixed impact driven by significant regulatory interventions in retail prices. However, sales of low segment volume declined by 14% mainly due to the continued increase in illicit and increase of biri consumption since the 30% price increase in June 2018. Significant volume loss in low segment in 1st half of the year caused by significant price hike and consumer switching to illicit and illegal products was halted by introduction of new brand (Royal) in low segment with higher price in Q3, 2019.

Adoption of IFRS 16 has some minor impact on the financial reporting of the company


Page 10 of 31


Changes in Tobacco Tariffs & Supplementary Duty Since June’19

Cigarette Price (10 Sticks) Supplementary Duty

Segment Existing Present Change Existing Present Change

Low BDT 35 BDT 37 5.7% 55% 55% 0%

Medium BDT 48 BDT 63 31.3% 65% 65% 0%

High BDT 75 BDT 93 24.0% 65% 65% 0%

Premium BDT 105 BDT 123 17.1% 65% 65% 0%

Bidi Price Supplementary Duty

Segment Existing Present Change Existing Present Change

Non-filter bidi (25 Sticks) BDT 12.5 BDT 14 12.0% 30% 35% 5%

Filter bidi (20 Sticks) BDT 15 BDT 17 13.3% 35% 40% 5%

Source: NBR (National Board of Revenue) SROs; Low segment cigarettes witnessed 30% price hike in June 2018

Meanwhile, significant price increase along with 14% volume drop in low segment against 13% growth in top three segments has reduced overall volume sales by 1.2% in 2019. Significant negative impact on earnings and decline in overall volume sales in first six months was somehow offset in the later part of the year with low segment price stability and price increase in top 3 segments.

Mixed performance was observed in segment-wise sales prior to and after price hike Though there is no available data on segmented sales break-down of BATBC, based on our estimates and analysis on total volume sales, revenue and SD indicates that top three segments have experienced volume de-growth in July- December period on YoY basis, due to significant increase in retail prices, off-setting handsome growth in Jan-Jun of 2019 in respective segments. However, evaluating the full year impact, according to the company disclosure, top 3 segment of the BATBC experienced growth over the last year mainly driven by favorable price index between different price segments in 1st half of the year along with focused brand activities and brand loyalty. The government has increased the prices of cigarettes in all segments in Bangladesh since June 2019. Meanwhile, to retain customers in similar price range, BATBC has introduced new strategic brand Royal at BDT 5.0 per stick, which is attracting consumer attention pretty well.

Volume stability in premium Segment: In 2019, the premium segment brand ‘Benson & Hedges’ maintained volume growth even after retail price hike by 17%. However, Price hike and influx of illegal cigarettes in the market caused lower than expected growth of the segment. Our market observation reveals that, within the legal branded Cigarettes ‘Benson & Hedges’ has enjoyed monopoly business due to limited availability of competitive brand ‘Marlboro’ as Philip Morris International, global manufacturer of Marlboro brand suspended its production and distribution of the brand globally. In 2020, we expect new competition in local market in Premium Segment from a number of new brand penetration by Japan Tobacco International.

Sound volume performance in high segment: In high segment, John Player Gold Leaf has registered 12% volume growth in 2019 compared to 2018 even after 24% regulator led price hike. Successful brand image, focused marketing initiatives and robust sales in first half of the year helped to retain growth during the year. Performance of this segment will be a bit challenging as down-trading is likely and also due to heavy influx of illegal brand cigarettes in the market.

Significant price increase along with 14% volume drop in low segment against 13% growth in top three segments has reduced overall volume sales by 1.2% in 2019


Page 11 of 31


Mid-segment retained industry average growth driven by pre-budget sales: The government of Bangladesh has increased floor prices of mid segment cigarettes by 7% in June 2018 and again 31% in June 2019. Mid segment brand ‘STAR’ enjoyed handsome volume growth in Jan-Jun 2019 as up-trading was observed after 30% price hike in low segment since June 2018. However, the growth in mid segment was significantly affected after 31% mid-segment floor price increase in Jun 2019 and down-trade started again while some part of the market went to the duty-evaded illegal brands. Significant volume loss in low segment was somehow halted by new brand introduction: Due to 30% price hike in June 2018 in low segment for economically stressed consumers, who are most sensitive to any price changes, the segment started to witness heavy decline in volume that also significantly affected overall financial performance of the company. Substantial impact on affordability amongst the price pressured consumer group contributed to the volume decline. During that time, a change in the behavioral and consumption patterns of the price-pressured consumers was observed and they switched to cheap, duty evaded locally manufactured as well as imported illegal cigarettes and biri. Some up-trading was also observed in the market up to June 2019. To tackle the challenge, in the second half of 2019, in order to prevent revenue loss, the company introduced new brand “Royals” in the low segment with higher price (BDT 5.0 per stick) that helped to partially offset loss sales in first half of the year. This is a unique strategic product penetration that got visible popularity among the value for money smokers within short span of time, who failed to afford mid segment after price hike. As the retail price of per stick mid segment brand Star was increased by almost 40%, this new brand (Royals) successfully attracted consumers at similar budget despite being classified as a low segment brand. In 2019 full year, net volume decline in low segment was 14%.

Withdrawal of export duty helped in the improvement in leaf export and start of factory made cigarettes export Along with domestic sales, higher contribution from sales of unmanufactured tobacco as well as locally produced factory made cigarette sales also contributed to the topline growth during the year. To encourage export sales, the government has withdrawn export duty on tobacco export in June 2019. Performance of the leaf export improved significantly, especially in the July to December period driven by withdrawal of the 10% export duty in last year. BATBC kicked-off its export of factory made cigarettes in 2019. The company recorded highest ever leaf export of USD 44.50 million in 2019 and first ever cigarette export to China & East Asia of 69 million stick cigarettes worth BDT 66.27 million export value. Export of factory made cigarettes bear huge potential for robust business growth even though the contribution is still insignificant limited to related company sales only. Commendable start of export of factory made cigarette indicates long term future growth potential for the company. The management of the company also acknowledges that BATB needs to build on its export growth momentum for factory-made cigarettes and identify a wider canvas of opportunities to transform this into a sustainable revenue source. However, we think to have a sizable export earnings contribution, BATBC will require more time.

Moderate growth in net revenue despite attractive gross revenue growth Overall net revenue increased by only 4% from cigarettes as the Supplementary duty, VAT and HDSC contribution from BATB increased by 19.4% for the year 2019 against 15.8%

gross revenue. Net turnover from domestic cigarettes increased marginally by only 1.1% in 2019. Net leaf export turnover in 2019 improved significantly (70% growth YoY) fueled by the withdrawal of 10% export supplementary duty in June 2019. After the low segment price escalation in June 2018, low segment volume sales dropped drastically and contribution from top three segment having higher tax incidence increased. Meanwhile,

Supplementary Duty Rates

55% 65% LOW

Segment

TOP-3

Segments

-

2,00 0

4,00 0

6,00 0

8,00 0

10,0 00

12,0 00

14,0 00

16,0 00

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2017 2018 2019

14

,42

9

15

,27

6

9,6

49

13

,85

0

15

,04

9

15

,15

5

9,2

30

11

,99

1

12

,63

1

13

,55

2

10

,44

6

12

,07

7

BATBC Volume Sales

BATBC kicked-off its export of factory made cigarettes in 2019


Page 12 of 31


after large price increase in top three segment in June 2019, slight down-trading in the industry was observed helping to partially offset loss of sales in low segment. But gross revenue growth was mostly driven by increased retail price in top three segments after June 2019.

Revenue Statement of BATBC

(in BDT million) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Gross revenue from domestic sale 63,279 72,416 87,411 107,492 124,003 141,639 163,998 201,918 230,674 266,018

Supplementary duty and VAT 44,837 51,803 62,420 78,144 90,885 103,614 121,715 151,973 178,218 212,983

Revenue from domestic sale, net 18,443 20,613 24,991 29,348 33,118 38,024 42,283 49,945 52,456 53,036

Gross revenue from finished goods export - - - - - - - - - 66

Export duty 0 0 0 0 0 0 0 0 0 0

Revenue from export of finished goods, net 18,443 20,613 24,991 29,348 33,118 38,024 42,283 49,945 52,456 53,102

Gross revenue from tobacco leaf export 2,707 2,941 2,763 2,090 2,722 2,073 1,636 2,222 2,444 3,770

Export duty 204 286 282 212 279 203 165 203 261 51

Revenue from leaf export, net 2,503 2,655 2,481 1,877 2,444 1,871 1,471 2,019 2,184 3,719

Total revenue from contracts with customers, net 20,946 23,269 27,471 31,225 35,562 39,895 43,754 51,964 54,640 56,821

Higher tax outgo along was caused by comparatively higher contribution from top three segment having higher tax incidence. In 2019, BATBC’s Contribution to the government revenue was BDT 226.3 billion against gross sales revenue of BDT 269.9 billion. So, even though gross revenue grew at an attractive rate, increased supplementary duty along with VAT and health development surcharges caused in lower net revenue growth.

Decline in net profit margin was caused by increase in manufacturing and operating expenditures BATB’s profit after tax dropped by 8% to BDT 9,246 million in 2019, mainly due to increase in manufacturing and operating costs. Gross profit margin declined due to increase in cost of goods sold. Per unit production cost of cigarette (excluding depreciation) rose to BDT 0.57 in 2019 against BDT 0.50 in 2018. Operating expenses of the company grew by 20.2% in 2019. Cost of sales & operating expenses increased to cater to the improved top segment mix and field force capability enhancement. Thus, incremental material cost (caused by inflation and higher product costs) and adverse impact of foreign exchange movement led to increased cost of goods sold during the year. Furthermore, increased competitive pressure in the industry from international player as well as illegal brand presence result in in higher operating costs. Previously, BATBC has been enjoying lower OPEX to sales ratio due to insignificant market competition mostly in top three segments. But entry of JTI in local market has increased the market competition to a great extent. Besides, large investment for product improvements and trade marketing capabilities to ensure long term sustainability against new competition and growing illicit market also increased operating cost. Additionally, higher tax incidence takes away largest share of the revenue pie of the company each year and result in silly profit margin compared to gross sales receipt. However, current tax expense for the year 2019 is in line with profit de-growth.

Strong cash position helped to remain free from debt financing BATBC maintained strong financial position despite challenging business environment. The company has efficiently managed its cash position, despite a tight liquidity situation in the economy that prevailed almost throughout the year. Thanks to the nature of cash based business transactions that helps to match its cash receipt almost similar to its total sales during the year. The company retained adequate level of its earnings each year after disbursement of dividend to the shareholders for meeting planned capital expenditures commitments as well as working capital requirements. Efficiently managed cash position helped in concluding the year with virtually zero borrowings.

Cost of sales & operating expenses increased to cater to the improved top segment mix and field force capability enhancement


Page 13 of 31


3.0 Historical Performance Review of the Key Financials Particulars (BDT mn)

Q1, 2017 Q2, 2017 Q3, 2017 Q4, 2017 Q1, 2018 Q2, 2018 Q3,2018 Q4,2018 Q1, 2019 Q2, 2019 Q3, 2019 Q4,2019

Volume Sale (mn Sticks)

14,429 15,276 9,649 13,850 15,049 15,155 9,230 11,991 12,631 13,536 10,442 14,204

Gross Revenue 51,542 53,800 41,647 57,151 59,836 59,914 50,273 63,095 64,955 69,292 60,114 75,494 Net Revenue 51,542 53,800 41,647 57,151 14,566 14,844 11,680 13,550 12,325 13,095 15,186 16,215 Cost of Sales 6,811 7,146 5,106 8,118 6,903 7,013 5,755 7,426 6,644 7,227 7,135 8,967 Gross Profit 6,171 6,736 5,526 6,350 7,663 7,832 5,925 6,124 5,681 5,868 8,051 7,248 Operating Profit 4,813 5,097 4,194 3,700 6,164 6,384 4,131 4,142 4,437 3,599 6,253 4,477 Profit Before Tax 4,582 4,791 3,942 3,444 5,831 5,959 3,625 3,899 4,181 3,268 5,757 4,198 Profit After Tax 2,194 1,888 1,985 1,763 2,749 3,075 2,046 2,141 2,059 1,751 2,661 2,776

Re. EPS (BDT) 12.19 10.49 11.03 9.80 15.27 17.09 11.37 11.90 11.44 9.73 14.78 15.42

Total Asset 37,704 45,434 49,784 46,415 47,935 60,489 59,815 56,543 51,526 72,775 59,313 57,758 Fixed Asset* 15,853 16,848 19,328 20,915 22,361 23,846 25,294 26,483 26,872 28,830 30,296 29,532 Inventory 13,598 18,844 24,906 17,469 18,910 26,112 29,972 19,429 17,625 30,928 22,080 16,538 Cash 3,634 1,016 1,267 978 1,035 655 1,138 1,634 2,172 1,768 3,412 5,394 Equity 21,076 19,364 21,349 23,112 25,862 25,337 27,383 29,529 31,588 32,526 33,000 35,793 Debt 0 5,800 6,435 3,058 1,500 12,312 5,780 5,180 0 16,616 674 0

*includes Asset under Construction; Note: Values in BDT million unless otherwise stated.

Steady business growth driven by the increased volume sales & progressive pricing policy of the government BATBC has recorded lucrative 16.9% CAGR in gross revenue over the year 2010 to 2019 driven by increased number of volume sales and progressive pricing and taxation policy by the government of Bangladesh. During the preceding 9 years CAGR of volume sales of the company was 7.7%. Volume sales in last 2 years experienced a declining trend due to increased market competition and mixed price impact. Meanwhile, the government of Bangladesh has been fixing up the prices of tobacco products in line with increase in its VAT & supplementary duty from this sector. Such price fixation by the government has resulted into revenue growth of the company much higher than the volume growth. CAGR of revenue net of VAT & Supplementary duty during the same time horizon was 18.8%.

Profitability: Last 5 years CAGR in net profit was 8.0%. However, BATBC’s growth in profit after tax was only 7.7% against 15.8% growth in gross revenue in 2019. Overall higher production and OPEX mainly contributed to lower profit growth. Profit before tax grew by 9.9% in 2019.

Gross Profit Margin Operating Profit Margin

35.7%

42.2%42.0%

44.0%44.3%

46.8%45.4%

47.7%

50.4%

47.3%

34. 0%

36. 0%

38. 0%

40. 0%

42. 0%

44. 0%

46. 0%

48. 0%

50. 0%

52. 0%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

20.6%22.5%

25.2%

30.4%32.4%33.1%

31.8%

34.3%

38.1%

33.0%

20. 0%

22. 0%

24. 0%

26. 0%

28. 0%

30. 0%

32. 0%

34. 0%

36. 0%

38. 0%

40. 0%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

29,911

34,738

39,011

42,541

48,340

53,204

51,425

50,813

-

10,0 00

20,0 00

30,0 00

40,0 00

50,0 00

60,0 00

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

Volume of Cigarette Sold (mn Sticks)


Page 14 of 31


Key Profitability Indicators

2011 2012 2013 2014 2015 2016 2017 2018 2019

Pre Tax Profit Margin 23.7% 29.2% 30.6% 31.2% 30.1% 32.3% 35.3% 30.6% 21.1%

Net Profit Margin (NPM) 14.3% 15.8% 17.7% 14.7% 17.3% 15.1% 18.3% 16.3% 11.0%

Net Profit Growth -17.6% 54.5% 24.9% 27.6% -6.5% 29.1% 3.3% 27.9% -7.6%

Return on Total Assets (ROAA) 19.2% 28.0% 29.4% 27.6% 20.7% 23.4% 19.2% 19.4% 15.9%

Return on Equity (ROE) 42.0% 60.9% 61.8% 61.7% 45.1% 45.3% 37.3% 38.0% 28.3%

Liquidity & Solvency: Low level of receivables and no additional borrowing in 2019 contributed to the improvement in current ratios. Adoption of IFRS 16 has some implication to the financial reporting. Though, over the long term, current ratios of the company remained standard, quick ratios of the company remained significantly lower mainly because BATBC retains lower amounts of cash and cash equivalent holdings after paying out dividends to its shareholders and meeting ongoing working capital as well as capital expenditures. As the company has already made large capex for business expansion, we expect that cash holding of the company will continue to go up like 2019 unless it pays out large portion of its earnings as dividend. We expect that both of its current and quick ratios will improve in future due to increased cash generation from business operation and lower capital expenditure and dividend payout ratios.

Liquidity & Solvency Measures

2011 2012 2013 2014 2015 2016 2017 2018 2019

Liquidity Measures

Current Ratio 1.2 1.3 1.2 1.1 1.3 1.5 1.3 1.3 1.7

Quick Ratio 0.3 0.5 0.3 0.2 0.3 0.2 0.2 0.3 0.5

Operating Efficiency Measures

Inventory Turnover Ratio (x) 15.5 3.1 3.0 2.5 2.4 2.1 1.7 1.5 1.7

Receivable Turnover Ratio (x) 31.8 28.7 36.5 28.0 29.5 43.7 30.8 16.8 16.8

Average Collection Period (Days) 11.3 12.5 9.9 12.8 12.2 8.2 11.7 21.4 21.5

Inventory Conversion Period(Days) 23.3 116.6 119.1 143.0 149.8 169.8 208.3 245.1 216.0

Operating Cycle (Days) 34.6 129.1 129.0 155.8 162.0 178.0 220.0 266.5 237.5

A/C Payable Turnover Ratio (x) 4.4 4.8 5.0 3.6 2.8 3.0 3.0 2.6 2.6

Payables Payment Period (Days) 81.8 75.8 71.5 98.7 127.2 121.0 121.3 137.0 136.7

Cash Conversion Cycle (Days) (47.2) 53.3 57.5 57.1 34.8 57.0 98.6 129.5 100.8

Total Asset Turnover (x) 1.8 1.9 1.9 1.6 1.4 1.3 1.3 1.1 1.0

Fixed Asset Turnover (x) 4.4 5.3 5.9 5.4 4.2 3.6 3.8 3.6 3.0

On operating performance scales, inventory turnover ratios have exhibited a declining trend over the long term but remained somehow stable in last three years and we expect same trend will continue. BATBC measures raw-materials and finished goods at lower of cost and net realizable value and spare parts are valued at cost. Components of inventories are Leaf, Wrapping materials, Work in process and finished goods (including VAT, Supplementary Duty & HDSC on finished goods). Regular increase in government taxes/ duties, increase in inventory holding to meet future sales while comparative stability in cost of goods sold can be attributed to reduction in inventory turnover ratio in recent years as inventory values continued to increase.

The company’s receivable turnover ratios and average collection period based on 360 days per year witnessed volatile trend over the years but remained stable in last two years. Intercompany transactions accounts for 2-3% of total account receivables. We expect a stable receivable turnover ratio of around 23-24 times and average collection period of around 15 days. Increased inventory conversion period coupled with increased in average collection period will result in increased operating cycle further.


Page 15 of 31


Account payable turnover ratio and payable payment period were almost stable. We expect account payable turnover ratio to decline slightly but will remain stable in coming years as account payables may increase with increase in raw-material prices against sales. Due to significant increase in operating cycle while stable payables payment period, cash conversion cycle of the company are also expected to go up further.

Both the total asset turnover ratio and fixed asset turnover declined as net revenue didn’t increase in line with increase in total asset as well as increase in fixed assets. Though gross revenue enjoyed handsome growth, high duties and taxes on sales prices as well as price stability resulted into slower net sales growth compared to total assets and fixed asset growth.

Our overall assessment is that, BATBC’s operating efficiency has declined over the past years and based on prevailing scenarios we expect the operating efficiency of the company will be weakening further in line with its business growth.

Controlled production cost and operation expenditures turned the company into operationally efficient, resulting in continued improvement in profit margins BATBC has significant control over its key raw-materials suppliers (tobacco leaf and wrapping materials). Raw-materials are procured from farmers under contract farming and other global group companies. Hence, bargaining power of suppliers is not significant and prices are under control. These resulted in steady production cost per unit of Cigarettes over the year.

Cost of Goods Sold % of Unit Sold OPEX to Sales Ratio

Meanwhile, government led price increase of Cigarettes in local market helped the company to enjoy boost in topline even after paying out all the required VAT, SD and HDSC. For the company, cost didn’t grow in line with increase in revenue rather it remained tagged in line with number of cigarette produced and sold. The company clearly enjoys economics of scale in its production that resulted into reduced cost per unit with the increase in production. Controlled operating expenditures along with increase in revenue and efficient marketing and distribution has resulted into drop in operating expenditures margin over the year. BAT Bangladesh has wider distribution network throughout the country having 1.3 million retailers, which it not easy to mimic by any other competitors. Finally, the total impact of controlled production cost and operational efficiency has resulted into improved performance in operating profit margin. However, marginal decline in operating profit margin in 2016 was mainly attributable to increased sales of lower priced cigarettes while sharp decline in top three segments due price hike in higher priced brands during 2015 and 2016. BATBC plans to continue to optimize its cost efficiency program without hampering on targeted production and sales level.

51.7%50.8%

53.3%

50.4%50.7%49.9%49.4%

51.1%

52.7%

59.1%

48. 50%

50. 50%

52. 50%

54. 50%

56. 50%

58. 50%

60. 50%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

15.0%

19.6%

16.8%

13.5%

11.9%

13.7%13.6%13.4%

12.3%

14.2%

10. 0%

12. 0%

14. 0%

16. 0%

18. 0%

20. 0%

22. 0%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019


Page 16 of 31


Continued investment in capacity enhancement, brand improvement, systems and people

Though cigarette industry in local market seems competitive, demand from overseas countries may flourish as Bangladesh remains in one of the lowest tariff regime. The analysis of BATBC’s financial statements and relevant disclosures reveal that the company has made significant investment as capital expenditures over the last couple of years. The company has set up a new cigarette manufacturing plant at Savar, however, detail of the expansion project has not been disclosed by the company. However, as local demand has slowed down, capacity enhancement may lead to increase in depreciation expenses that will result in narrow profit margins in the short term.

BATBC’s has increased its cigarette manufacturing capacity to almost 70 billion by setting up a new large scale cigarette manufacturing facility at Savar. Very little disclosure is available from the company regarding the newly constructed plant at Savar.

(in BDT mn) 2011 2012 2013 2014 2015 2016 2017 2018 2019

Fixed Assets 4,426 4,933 5,672 7,548 11,366 12,947 14,265 15,841 21,786 Asset Under Construction 950 929 2,842 4,471 2,299 2,465 6,650 10,643 7,746

Total PPE 5,377 5,862 8,513 12,019 13,665 15,412 20,915 26,484 29,532

Addition to AUC 587 0 1,913 3,918 1,881 2,539 6,363 6,295 3,956 Transfer from AUC -533 -22 0 -2,288 -4,052 -2,373 -2,178 2,303 6,852 Net Capex (From CF Statement) 680 1,086 3,377 4,372 2,643 3,515 7,991 6,878 3,141 Capital expenditure commitment 130 337 309 160 436 2,662 5,039 3,488 1,658

*n/a= information not available. Source: Company Annual Reports and latest Unaudited Statement for FY2019.

4.0 Company Fundamental Review & Analysis

A market leader in tobacco industry of Bangladesh, having more than hundred years of successful business operation history in this region British American Tobacco has been serving the market in this region since 1910. BAT Bangladesh is a part of British American Tobacco plc, one of the leading global tobacco group that manufactures and markets different brands of tobacco products in more than 200 msarkets around the world. BATBC is also the leading tobacco manufacturing and distribution company in Bangladesh having approximately two-third of the total tobacco market share.

Initially, British American Tobacco Group commenced its business in this region with the name of Imperial Tobacco by setting up its first sales depot at Armanitola in Dhaka in 1910. After the partition of India in 1947, Pakistan Tobacco Company was established in 1949. The company setup its first factory in Bangladesh (the then East Pakistan) in 1949 at Fauzdarhat, Chittagong. Later, it went into the production of its second factory in 1965 at Mohakhali, Dhaka. Thereafter In 1972, after the independence of Bangladesh, the company was renamed as Bangladesh Tobacco Company Limited. In 1998, the Company changed its name and identity to British American Tobacco Bangladesh (BAT Bangladesh).

BATBC is a public limited company and one of the pioneer companies in Bangladesh capital market that became listed with both the Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) at the very beginning. It was listed in DSE in 1977 and CSE in 1996. BATBC is one of the top three largest market cap issues in DSE.

Leading tobacco products manufacturing company in Bangladesh

BAT Bangladesh is a part of British American Tobacco plc, one of the leading global tobacco group


Page 17 of 31


4.1 Shareholding Structure

Sponsor holds majority of the company shares while government of Bangladesh has representation in board of directors having minority holdings BATBC offloaded part of its shares in the capital market by listing with DSE in 1977. As on 29 February 2020, 72.91% of the shares of the company are held by British American Tobacco Group, 0.64% by the Government of People's Republic of Bangladesh, 10.15% of the shares are held by different institutional investors and rest 13.74% shares are held by various foreign shareholders while local retail investors holds only 2.56% of the share of the company. Currently, Pictet Lux A/C Kffcf holds more than 10% (10.21%) of the total shares of the company.

BATBC’s sponsor Raleigh Investment Company Limited is based in London, United Kingdom and operates as a subsidiary of British American Tobacco plc. British American Tobacco plc was founded in 1902. The company has a prestigious history of global business with some leading tobacco brands. It holds the leadership position in tobacco market in more than 55 countries.

History of Change in Ownership Structure of BATBC

Name of the Shareholders 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Raleigh Investment Co. Ltd. (Sponsor) 65.91% 65.91% 72.91% 72.91% 72.91% 72.91% 72.91% 72.91% 72.91% 72.91%

Foreign Corporate Investors 0.00% 0.00% 0.00% 0.00% 0.00% 13.95% 14.41% 15.34% 16.39% 14.03%

Government of People's Republic of Bangladesh 0.64% 0.64% 0.64% 0.64% 0.64% 0.64% 0.64% 0.64% 0.64% 0.64%

Investment Corporation of Bangladesh (ICB) 17.41% 17.52% 11.51% 10.16% 8.34% 7.65% 7.05% 6.39% 5.69% 5.82%

Shadharan Bima Corporation 2.82% 2.82% 2.82% 2.82% 2.82% 2.82% 2.82% 2.82% 2.82% 2.82%

Bangladesh Development Bank Limited 0.99% 0.99% 0.93% 0.37% 0.33% 0.33% 0.33% 0.33% 0.33% 0.33%

Sena Kallyan Sangstha 0.26% 0.26% 0.26% 0.26% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Local Corporate Investors 0.00% 0.00% 0.00% 0.00% 0.00% 0.91% 1.02% 0.85% 9.36% 9.95%

Other 11.97% 11.86% 10.92% 12.84% 14.95% 0.79% 0.81% 0.71% 0.70% 2.47%

Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Source: BAT Bangladesh annual reports, DSE Website & EBLSL Research

Besides the sponsor and direct government holding, various state-owned entities hold significant of the shares of the company. Among the shareholders other than the sponsors, state-owned ICB previously held more than 10% of the shares of the company. However, the entity has been reducing its shareholding over the year and effectively reduced from more than 20% in 2006 to less than 6% by 2019. Meanwhile, looking into the growth prospect of the company’s future potential the sponsor Raleigh Investment Co. Ltd., a subsidiary of British American Tobacco plc has increased its holding from 65.91% in 2011 to 72.91% in 2012. Bangladesh Development Bank Limited (previously Bangladesh Shilpa Rin Sangstha) has also reduced its holding over the year up to 2014 and presently holds only 0.33% of the total company shares. Sena Kallyan Sangstha had 0.26% of the shares that were also offloaded in 2014. Shadharan Bima Corporation has 2.82% of shares of the company. Owing to the high growth prospect of the BATBC’s Bangladesh operation, foreign investors started to take the position of company shares and presently more than 13% shares of the company are held by foreign investors while only 2.56% shares are held by general public.

Sponsor/Director Govt. Institute Foreign Public

As on Feb 29, 2020 72.91% 0.64% 10.15% 13.74% 2.56%

As on Jan 31, 2020 72.91% 0.64% 10.00% 13.89% 2.56%

As on Dec 31,2018 72.91% 0.64% 9.36% 16.39% 0.70%

As on Jun 31,2018 72.91% 0.64% 10.44% 15.21% 0.80%

As on Dec 31,2017 72.91% 0.64% 10.40% 15.34% 0.71%

As on Dec 31,2016 72.91% 0.64% 11.23% 14.41% 0.81% Source: DSE Website, Company Annual Report and EBLSL Research


Page 18 of 31


4.2 Corporate Governance Assessment

BAT Bangladesh has sound corporate governance practices among the listed companies in Bangladesh Capital Market

The corporate governance of BATBC is reasonably good with experienced management team guided by board of directors having diversified background and backed by BAT’s hundred years of successful global operational experience. Overall the quality of financial reporting appears to be transparent & fair enough though disclosures of material facts seems reasonable but not adequate.

The company has the policy towards developing its human resources by providing adequate training and enabling them to gain global experiences by working in different parts of the BAT’s global operation. Its homegrown management team helps BATBC achieve its own strategic vision. In conjunction with BAT’s global experiences, its management team can choose the right strategic direction in right time in such a highly regulated and competitive local market. The company’s strategic leadership has been proven by successfully handling various challenges like introduction of branded quality cigarettes in the lower segment of the market when prices of the upper segments were set at a much higher rates by the government.

The overall corporate governance practices of the company can be summarized as;

Seasoned professionals in board consist of successful long career history within the company as well as representation from government having diversified background

Have 2 independent directors along with seven non-executive directors and one female director in the board, meeting the standard governance criteria

Regular attendance in the board meetings and other committee meetings by the board members

None of the independent directors possess any shares of the company as on date

Non-executive directors do not take part in any day-today business operation of the company and high qualified management team

Policy to recruit highly talented graduates and proving high quality training both at home and abroad so that they can serve BAT anywhere in the world and perform in line with the company’s strategic vision and achieve organizational goal

Steering Group (SG) was introduced by BAT Bangladesh with cross functional senior managers to act as a sounding board, helping executive committee to optimize decisions and build a highly engaged, transparent, well informed organization

Have reasonable and necessary disclosure of material facts and figures in its annual reports as well as quarterly disclosure. Some facts like details on ongoing expansion plans and potential impacts are not disclosed. The company didn’t make any detail disclosure on its new factory setup at Savar, expected timeframe to complete the project and expected incremental impact on its profitability. BATBC also doesn’t make any disclosure on segment wise revenue and performance as well as market share data in its annual reports and financial statements notes.

Investors relation practice is average standard and key management personnel are reluctant to talk with investors and analysts

Have sound internal audit, control and risk management policy Possess unique ability to rapidly adopt any new regulatory challenges,

competitive environment and ultimately succeed in changing business setting Regularly disburses handsome cash dividend from its earnings to the

shareholders

Overall the quality of financial reporting appears to be transparent & fair enough though disclosures of material facts seems reasonable but not adequate


Page 19 of 31


4.3 Business overview- Key products offerings BATBC produces range of products covering all segments, from low to premium.

Branded cigarette product offering in all segments catering to the need for consumers from all income level: BATBC manufactures and market high quality and well established international cigarette brands covering all segments, from low to premium. Current brands of the company are Benson & Hedges, John Player Gold Leaf, Pall Mall, Capstan, Star, Royals, Pilot, Bristol, Derby and Hollywood which are positioned in four segments in the Bangladesh cigarette market. Premium Segment: Benson & Hedges Benson & Hedges has been dominating the premium segment of Bangladesh tobacco market since 1997. In 2012, the company launched a new and unique variant- Benson & Hedges Switch, the first ever capsule cigarette launched in Bangladesh. There are various variations within the brand to meet diverse consumer expectations and choices.

High Segment: John Player Gold Leaf, Pall Mall and Capstan John Player Gold Leaf, Pall Mall and Capstan are positioned in the aspirational premium segment. Launched in 1980, John Player Gold Leaf is one of the highest selling brands of our company, enjoying large market share in the aspirational premium segment. Pall Mall was the Group’s first Global Drive Brand to be launched in Bangladesh in 2006.

Medium Segment: Star Star and Star Next are positioned in the Value for Money (VFM) segment. Star was launched in 1964 and Star Next was launched in 2012. The brand has absolute leadership in the segment with a robust performance.

Low Segment: Pilot, Hollywood and Derby BATBC has four brands in Low Segment – Royals, Derby, Pilot & Hollywood. Royals was launched in 2019 as a strategic offering against competitive offering after significant price in medium segment. Derby was launched in 2013 and is the biggest brand among the three. Pilot was launched in 2009 and at present it is the fastest growing brand in the industry. Besides, Hollywood was launched in 2011.

4.4 Business overview- Raw-materials sourcing

BAT Bangladesh sources its required raw-materials from domestic as well as international sources: BAT Bangladesh procures its raw- materials from both domestic and international (group companies) sources. BATBC doesn’t own any tobacco farm but it has agreement with farmers for leaf sourcing, whom the company provides agronomy support. BATBC’s contract farming has ensured uninterrupted supply of tobacco leaf of the company for decades. The company provides the know-how and bears the full cost to install Compost Pits in the homesteads of its registered farmers. BATBC purchases leaf and wrapping materials from various group companies including BAT Singapore (Private) Limited and BAT (GLP) Limited.


Page 20 of 31


5.0 Bangladesh Tobacco Industry Insights Bangladesh represents a frontier market opportunity with respect to consumption, sustained by accelerated economic growth driving per capita income and discretionary consumer spending. The cigarette industry is evolving at a rapid pace with the ever-changing demands and needs arising from consumers every day, despite being considered as a harmful good for the consumer health. The cigarette industry represents a large and well segmented market with highly regulated environment. Cigarette industry in Bangladesh constitutes active presence of a number of international players along with local manufacturers. However, the industry is concentrated in nature where only three big players capturing major share of the market along with few smaller players having insignificant market presence. Bangladesh also has a large cottage industry for biri market. There are also presence of Chewing tobacco, zorda and gul etc. Though share of biri within the tobacco industry is in declining ways over the year, any price hike in low segment floor prices creates short term down-trade for price pressured consumer segment. Cigarette industry experienced a challenging year in 2019. The estimated size of the country’s overall cigarette market is about Tk. 350 bn. The overall legal cigarette industry volume was declined by 5% compared to the previous year. Two factors mainly caused the volume de-growth in tobacco industry; the industry experienced an upsurge in illegal brands in different forms; i.e. DNP (Duty Not Paid), Counterfeit & Transit illegal cigarettes. In 2019, the decline was mostly contributed by the low segment sales. Due to significant price increase since July 2018, causing consumers to shift to cheaper illegal cigarettes, low segment started to witness sharp volume decline and the situation continued till June 2019. Low segment product volume was declined by 17% on YoY basis. To prevent the revenue loss, the industry launched new brands in the low segment with higher price within the price band set by the government. As a result significant revenue loss from down-trading from mid segment to low segment was halted.

Strong growth in Cigarette consumption driving the global tobacco industry growth According the BAT plc UK website, the size of the global legal tobacco market is estimated at some USD 814 billion (2018), of which the global cigarette market is valued at around USD 700 billion (90% of the tobacco market size), with around 5,300 billion cigarettes consumed per year. Growing demand for tobacco products made this a lucrative industry and specially to cultivate, manufacture and sale in the poorest countries of the world. Tobacco has been cultivated in Bangladesh for ages but the production of tobacco has risen tremendously since 1980. Tobacco consumption in Bangladesh sharply rose in recent years. According to BAT global website, total tobacco consumption, including illicit, declined 2% from 2018 to 2019; this decline rate is forecasted to remain between 2%-3% over the next three years, while the retail value of tobacco sales is expected to increase by between 2%-4% each year, driven principally by pricing.


Page 21 of 31


Cigarettes dominate among various forms of tobacco consumption The consumption of tobacco products takes place in several forms, which includes: Cigarettes, Bidis, Chewing tobacco (Loose leaf , Pellets, Plug, Twist), Cigars’ Blunts’ Cigarillos, Dokha, Roll-Your-Own cigars, Kreteks, Creamy snuff, Dipping tobacco, Extra-long cut, Dissolvable tobacco, Tobacco gum etc. Gul, jarda, sadapata and khainy are known as smokeless tobacco that largely consumed by the low income group of people. Smokeless tobacco includes products that are chewed, sucked, dipped, held in the mouth, or inhaled. Bidis are more popular among the poor in Bangladesh. However, the size of the traditional tobacco industry is shrinking but the market share of cigarettes is increasing as consumer are moving from bidi to cigarette. Bidi that occupied almost 30% of the tobacco market size now occupies only around 10% of total tobacco industry, with approximately 75% of total volume sales in Bangladesh. This change is driven by the strong economic development of the country. This change in consumer behavior has also increased the value of the industry. Cigarettes is the major form of modern day tobacco consumption. Based on consumers’ preferences and income group, the Cigarettes products can be divided into four categories in Bangladeshi tobacco market – Premium, High, Medium and Low segment.

An oligopolistic market, where only four companies control the total market Within the two prime form of tobacco, the cigarette market in Bangladesh is highly concentrated while bidi manufacturing is more segmented. The tobacco industry of Bangladesh is controlled by British American Tobacco (BATBC), Japan Tobacco International (previously Dhaka Tobacco under Akij Group), Abul Khair Tobacco and Nasir Tobacco.

Market Segmentation of Top Tobacco Brands

Premium High Medium Low

BATBC Benson & Hedges

John Player Gold Leaf, Pall Mall and Capstan

Star, Starlight, Star-next

Royals, Bristol, Pilot and Hollywood

Japan Tobacco International

n/a n/a Navy LD, Real, Sheikh and K2

Abul Khair Tobacco n/a n/a Marise Rally and Sun Moon

Nasir Tobacco Industries

n/a n/a n/a Nasir Gold, Asia and Top 10

Source: EBLSL Research

The market competition increased aggressively after the entry of Japan Tobacco Inc. (JTI) in Bangladesh by acquiring akij group’s Dhaka Tobacco at a deal value of $1.5 billion. Followed by the single largest foreign direct investment (FDI) in Bangladesh’s private sector from Japan Tobacco Inc. (JTI), the industry has seen aggressive marketing campaign, business expansion and large recruitment with attractive remuneration and benefit packages from JTI, posing serious business threat to other players, including BATBC. BATBC has active presence in all four categories of cigarettes in the market while JTI goes for the medium and lower segments and Nasir Tobacco Industries competes only in the lower segment. Looking forward, we expect penetration of new global brands from Japan Tobacco’s own portfolio along with its existing popular local brands like Navy (BDT 7.0 per stick) and Sheikh (BDT 4.0 per stick), K2 etc. JTI has already started to market JTI’s few regional and international brands in low segment like Real (BDT 4.0 per stick) and LD (BDT 5.0 per stick). JTI is set in to launch a number of global brands in premium and high segment in Bangladesh market.

67

%

74

%

79

%

75

%

53

%

60

%

33

%

26

%

21

%

25

%

47

%

40

%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20

14

20

15

20

16

20

17

20

18

20

19

% o

f To

tal

Industry Volume Sales Breakdown

Top 3 Low


Page 22 of 31


Demand for Cigarette doesn’t affected significantly despite significant increase in prices while high taxation couldn’t harm the financial health of the leading manufacturers to a great extent The price of cigarettes in Bangladesh is one of the lowest in the South -East Asia Region1, indicating that further increase in tax on cigarettes might be imposed to raise the price to the average regional level. Almost every year in Bangladesh, the prices of tobacco increases as the National Board of Revenue (NBR) increases the taxes on tobacco and tobacco related products. But that increase doesn’t hurt the tobacco companies due to lower price elasticity of demand for tobacco products except for low segment.

There are few research available on the price responsiveness of cigarette demand in Bangladesh. A study on The Price Sensitivity of Cigarette Consumption in Bangladesh: Evidence from the International Tobacco Control (ITC) Bangladesh Wave 1 (2009) and Wave 2 (2010) Surveys2 found that the total price elasticity of demand for cigarettes was estimated at −0.49. The elasticity of smoking prevalence accounted for 59% of the total price elasticity. The price elasticity of smoking prevalence and smoking intensity were higher the lower the socioeconomic status (SES). The total price elasticity was measured at −0.75 for the low SES group, −0.40 for the medium SES group and −0.36 for the high SES group.

Another study on the Economics of Tobacco and Tobacco Taxation in Bangladesh3 used annual time series data on aggregate cigarette consumption from 1981 through 2004 and found that Cigarette price is found to have a negative and statistically significant impact on cigarette demand in Bangladesh, while income is found to have a positive and statistically significant impact. Estimated short run price and income elasticities for Cigarette are –0.41 and 1.14 respectively, with long run estimates of –0.57 and –1.46. Together, as per the study report, the estimates imply that the past decade’s general trend towards increasingly affordable cigarettes, plus the combined effect of reductions in cigarette prices and increases in household income, have led to significantly higher cigarette smoking in Bangladesh than would have been the case had cigarettes remained less affordable.

While the country’s real incomes were falling between 1997 through 2002, Cigarettes became increasingly less affordable. Afterwards 2002, when incomes rose rapidly, it became more affordable. The reduction in affordability contributed to the declines in per capita cigarette consumption during this period. Similarly, increasing affordability of cigarettes after 2002 is a key factor in the rise in per capita consumption from 2003 through 2010.

Influx of unauthorized illicit cigarettes accelerating at a faster pace with the surge in retail prices While legal tobacco industry is subject to extensive regulations, illicit cigarettes and biri industries operate largely unchecked. Cigarette industry is highly price sensitive and any changes in retail prices cause changes in the consumption pattern of consumers. Up-trading, down-trading or switching to illegal-smuggled cigarettes are common phenomena after any changes in retail prices. With legally manufactured cigarettes becoming more expensive in line with the arbitrary price hikes by the government with the objective of reducing the tobacco consumption, price-pressured consumers have

1 http://www.who.int/tobacco/global_report/2011/en_tfi_global_report_2011_appendix_VI_table_2.pdf 2 Nargis N, Ruthbah UH, Hussain AKMG, et al; The price sensitivity of cigarette consumption in Bangladesh: evidence from the International Tobacco Control (ITC) Bangladesh Wave 1 (2009) and Wave 2 (2010) surveys; Tobacco Control Published Online First: 08 October 2013. doi:10.1136/ tobaccocontrol-2012-050835 3 Barkat A, Chowdhury AU, Nargis N, et al. The Economics of Tobacco and Tobacco Taxation in Bangladesh. Paris: International Union Against Tuberculosis and Lung Disease, 2012

Illegal Cigarettes constitute

11%+ of the market


Page 23 of 31


increasingly shifted to illicit duty evaded cigarettes. Illegal cigarette trade has surged exponentially over the past few years. That indicates that price control mechanism has demonstrated a negative trade-off in the market. Instead of quitting smoking, government led price hike has resulted in increased consumption of duty evaded cheaper illicit cigarettes. Surge in illegal cigarettes remains a cause of concern and a clear threat to the sustainability of legally established brands in the industry.

According to the BATBC, estimated smuggled/ illegal cigarettes make up for around 11% of the country’s total tobacco market as on Q1 of the 2019, which might have increased further in later period. 30% price hike in low segment in June 2018 created the inducement for increased illicit cigarette trade and have paved the way for numerous illicit, fake and replicating of branded cigarette brands to flourish. Moreover, significant price hike in top three segments in June 2019 has again made illegal cigarettes more attractive than the branded legal cigarettes. We have seen noticeable presence of such cigarettes in the market especially in the distant rural areas.

According to media reports, there are more than 50 local cigarette brands from almost 30 local manufacturers, of which a large number of manufacturers are selling cigarettes without paying proper taxes4. Currently, there are handful presence of such local manufacturers in rural areas of Rajshahi, Rangpur, Sylhet, Chittagong, Kustia, Mymenshing with brand names such as Sahara, Express, Senor Gold, Durly, Black, Vorosha, Partner, Desh Black, Topi Ten, Fresh Gold, Super Gold, Senor Gold Pure, Ramna, Gold Hill, Wilson, Golden Hill, City Gold, City Black etc. available at a price range of BDT 10 to BDT 50 per 10 sticks whereas minimum price of legally manufactured cigarette is currently BDT 37 per 10 sticks. Fake or replicated branded cigarettes are also available in the market where even used cigarette packs, tax stamp or band roll are reused illegally. Besides, the market has also presence of foreign branded duty evaded cigarettes like 303, Ezee, Mond, Jet etc.

If the government doesn’t take adequate action and drive against the illegal and duty evaded cigarettes in the market, we foresee that market presence of such cigarettes will continue to hurt the performance of legal brands including BATBC. According to BATBC annual report, there have been examples of such rapid growth of illicit brands across many neighboring countries as well, like Malaysia where 59% of the cigarette industry now comprises of illicit brands. However, the Bangladesh Government has conducted several successful enforcements against the trade of illegal cigarettes throughout 2019 as it also linked with the loss of government revenue.

Local procurement of key raw-materials is helping the growth in tobacco industry The prime raw-material of cigarette is tobacco leaf that grows in two varieties: Nicotiana tabacum, or cultivated tobacco, and Nicotiana rustica, or wild tobacco. The tobacco plant requires a frost-free growing season of 100-130 days and thus it is likely to be cultivated within 50 degrees latitude of the equator. A thin, flammable paper produced from seed flax mixed with paper pulp is used for Cigarette rolling papers. The Cigarette filters are made of synthetic, cotton-like fibers. Hard or soft cardboard boxes, wrapped in protective cellophane is used for packaging cigarettes. The cultivation of tobacco crops in Bangladesh are concentrated in Rangpur and Kushtia districts and some part of Hill Tracts. According to Agricultural Extension Department (AED) statistics based on 2016 data5, out of 1,15,875 hectors of total arable land in Kushtia, tobacco is being cultivated in 30,000 hectors of land at present. The attraction of

4 https://bit.ly/31WGRUc

https://www.bhorerkagoj.com/print-edition/2019/04/23/247031.php 5 http://www.dhakatribune.com/bangladesh/2016/12/13/tobacco-production-kushtia-rise/

https://bit.ly/31WGRUc

https://www.bhorerkagoj.com/print-edition/2019/04/23/247031.php

http://www.dhakatribune.com/bangladesh/2016/12/13/tobacco-production-kushtia-rise/


Page 24 of 31


profits also drives the growing preference for the crop. The sowing period for tobacco cultivation is Mid-October to Mid-December and harvesting period is Mid-February to Mid-April, according to the agricultural wing of BBS.

Smoking Tobacco is prepared by drying the leaves of tobacco plant. Tobacco contains alkaloid nicotine, one kind of drug. Dried tobacco leaves are mainly smoked in cigarettes, cigars, pipe tobacco and flavored shisha tobacco. These are also consumed as snuff, chewing tobacco and dipping tobacco.

Tobacco sector remained prime contributor to the government revenue

Growth in the government revenue from legal cigarette industry in 2019 (Jan-Dec) was 16%, which is in line with the historical growth rate of 15-17% per annum with bulk revenue contribution coming from the low segment. The industry has witnessed steep increases in supplementary duties and taxes over the years and tax incidence may increase further in future. Total average tax incidence accounts for 78% of our retail price. In the Premium segment, total tax incidence is almost 81%, according to BATBC. In Bangladesh, an absence of a long-term pricing and taxation strategy leads to unprecedented price and tax hikes in certain segments during the national budget every year.

In Bangladesh, prices of tobacco are usually fixed by the government in various categories. The price of tobacco leaf as well as cigarette & other tobacco related products has been increased over the period due to increased tax and other duty as well as other factors. Over the year 2009 to 2019, nearly all the tobacco related products increased up to four to five times. In cases where the government doesn’t fixes any price slab, companies are free to set the prices based on respective categories and market demand scenario.

Price Slab (10 Sticks) of Cigarette Fixed by NBR

2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Premium 60.00+ 66.00+ 80.00+ 90.00+ 70.00+* Not fixed Not fixed 105.00+ 123.00+

High 32.00-36.00 35.20-39.50 42.00-45.00 50.00-54.00 40.00-69.00 70.00+ Not fixed 75.00+ 93.00+

Medium 22.50-23 24.75-25.25 28.00-30.00 32.00-35.00 20.00-39.00 45.00+ Not fixed 48.00+ 63.00+

Low 11.00-11.30 12.10-12.30 14.00-14.20 15.00-16.50 19.00 23.00 27.00(Local) 35.00(MNC)

35.00 37.00+

*Brands having priced above BDT 90 per 10 sticks were ordered to increase by taka 10 per 10 sticks in FY2015-16 Source: NBR SROs (Statutory Regulatory Orders), National Budget Speech & EBLSL Research

Price Slab (10 Sticks) of Bidi Fixed by NBR

Unit 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Non-filtered bidi 25 Sticks 4.36 5.80 6.14 7.06 10.61 12.50 12.50 14.00

Filtered bidi 20 Sticks 4.93 6.30 6.94 7.98 12.03 12.00 15.00 17.00 Source: NBR SROs (Statutory Regulatory Orders), National Budget Speech & EBLSL Research

Supplementary Duty (SD) Rates on Cigarettes & Bidi Imposed by NBR

2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Premium 60% 61% 61% 61% 63% 65% 65% 65% 65%

High 58% 59% 59% 61% 61% 65% 65% 65% 65%

Medium 55% 56% 56% 60% 60% 63% 63% 65% 65%

Low 36% 39% 39% 43% 48% 50% 52%(Local) 55%(MNC)

55% 55%

Non-filtered bidi 20% 20% 30% 25% 25% 30% 30% 30% 35%

Filtered bidi 25% 25% 30% 30% 30% 35% 35% 35% 40% Source: NBR SROs (Statutory Regulatory Orders), National Budget Speech & EBLSL Research


Page 25 of 31


Applicable Tax Rates, other than SD, on Cigarette Industry

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Value Added Tax (VAT)*

15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15%

Health Development Surcharge (HDSC)*

0.0% 0.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Custom/ Export Duty* 10.0% 10.0% 10.0% 10.0% 10.0% 25.0% 10.0% 0.0%

Corporate Tax Rate 35.0% (Listed)

42.5% (Non-listed)

40.0% (Listed) 45.0% (Non-listed)

40.0% (Listed) 45.0% (Non-listed)

45.0% 45.0% 45.0% 45.0% 45.0%

Surcharge on PBT** 0.0% 0.0% 0.0% 0.0% 0.0% 2.5% 2.5% 2.5%

Minimum Turnover Tax 0.0% 0.0% 0.3% 0.3% 1.0% 1.0% 1.0% 1.0% *To be charged on Gross Revenue; PBT=Profit before tax Source: NBR SROs (Statutory Regulatory Orders), National Budget Speech & EBLSL Research

In Bangladesh, the cigarette tax structure is a tiered structure that imposes different ad valorem tax rates known as supplementary duty (SD) based on retail price slabs. The industry is highly taxed in the form of Supplementary Duty, VAT & Custom Duty. The supplementary duty varies significantly across tobacco products and brands. While listed companies in other sectors enjoy a differential corporate tax rate, the same privilege was withdrawn by the government for BATBC, the only listed cigarette companies in Bangladesh. Cigarette manufacturers now belong to 45% of corporate income tax rate along with additional 2.5% surcharge on the profit before tax.


Page 26 of 31


Net Profit after tax (BDT mn) EPS & EPS Growth- Historical & Projected

Historical & Projected Cigarettes Production by BATB (in Bn Sticks)

Projected Gross Profit Margin & Growth for BATB

Quarterly EPS & Growth (YoY)

20

10A

20

11A

20

12A

20

13A

20

14A

20

15A

20

16A

20

17A

20

18A

20

19A

20

20E

20

21E

20

22E

20

23E

20

24E

3,0

94

2,5

51

3,9

42

4,9

24

6,2

82

5,8

74

7,5

82

7,8

30

10

,01

2

9,2

46

8,6

63

14

,43

0

18

,56

0

21

,54

6

26

,21

8

42

.51

65

.69

82

.07

10

4.7

0

97

.90

12

6.3

7

13

0.5

0

16

6.8

7

51

.37

48

.13

80

.16

10

3.1

1

11

9.7

0

14

5.6

5

-17

.6%

54

.5%

24

.9%

27

.6%

-6.5

%

29

.1%

3.3

%

27

.9%

-69

.2%

-6.3

%

66

.6%

28

.6%

16

.1%

21

.7%

-80.00%

-60.00%

-40.00%

-20.00%

0.0 0%

20. 00%

40. 00%

60. 00%

80. 00%

0.0 0

20. 00

40. 00

60. 00

80. 00

100 .00

120 .00

140 .00

160 .00

180 .00

20

11A

20

12A

20

13A

20

14A

20

15A

20

16A

20

17A

20

18A

20

19A

20

20E

20

21E

20

22E

20

23E

20

24E

EPS EPS Growth

26.4 30.0 35.3 39.1 43.0 50.0 53.7 49.3 50.2 41.0 47.5 49.4 54.5 64.1

-0.5

%

13.6

%

17.6

%

10.6

%

10.1

% 16.2

%

7.4%

-8.2

%

1.7%

-18.

2%

15.7

%

4.1%

10.3

% 17.6

%

-20.0%

-15.0%

-10.0%

-5.0%

0.0 %

5.0 %

10. 0%

15. 0%

20. 0%

0.0

10. 0

20. 0

30. 0

40. 0

50. 0

60. 0

70. 0

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24Prodcution (Bn Sticks) % Growth

42

%

42

%

44

%

44

%

47

%

45

%

48

%

50

%

47

%

46

%

55

% 59

%

60

%

61

%

31%

17%19%15%

18%

6%

25%

11%

-3%1%

45%

25%

15%21%

-10.0%

0.0 %

10. 0%

20. 0%

30. 0%

40. 0%

50. 0%

0.0 %

10. 0%

20. 0%

30. 0%

40. 0%

50. 0%

60. 0%

70. 0%

20

11A

20

12A

20

13A

20

14A

20

15A

20

16A

20

17A

20

18A

20

19A

20

20E

20

21E

20

22E

20

23E

20

24E

Gross Profit Margins Gross Profit Growth

12.2

10.5 11.09.8

15.3

17.1

11.4 11.9 11.4

9.7

14.815.4

17.3%

-4.9%

25.8%

-18.0%

25.3%

62.9%

3.1%

21.4%

-25.1%

-43.1%

30.1% 29.6%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4E Q1 Q2 Q3 Q4

2017 2018 2019

EPS EPS Growth (YoY)


Page 27 of 31


Condensed Statement of Profit or Loss (BDT million)

Particulars Year

2017A Year

2018A Year

2019A Year

2020E Year

2021E Year

2022E Year

2023E Year

2024E

Quantity Sold (million sticks) 53,204 51,425 50,813 40,635 47,012 48,942 53,997 63,479

Gross Turnover 204,140 233,118 269,855 248,600 294,507 320,041 345,345 387,648

Less: Value Added Tax, HDSC and SD 152,176 178,478 213,033 189,625 223,334 237,243 251,133 274,480

Net Turnover 51,964 54,640 56,821 58,974 71,173 82,799 94,212 113,168

Cost of Goods Sold 27,181 27,096 29,973 31,870 31,974 33,695 37,532 44,476

GROSS PROFIT 24,783 27,543 26,849 27,105 39,199 49,104 56,679 68,691

Operating Expenses: 6,981 6,724 8,082 9,734 10,268 11,890 13,480 16,124

Selling and Distribution Expenses 6,981 6,724 8,082 9,734 10,268 11,890 13,480 16,124

PROFIT FROM OPERATIONS 17,802 20,820 18,767 17,370 28,932 37,214 43,200 52,567

Financial Expenses 192 474 471 0 0 0 0 0

Interest Income 7 - 0 0 0 0 0 0

Other Non-Operating Income 50 - 24 0 0 0 0 0

Other Non-Operating Expenses / loss on disposal of PPE

25 15 0 0 0 0 0 0

Share on profit (loss) on associate (net of tax)

- - - - - - - -

PROFIT BEFORE WPPF 17,642 20,331 18,320 17,370 28,932 37,214 43,200 52,567

Allocation for WPPF 882 1,017 916 869 1,447 1,861 2,160 2,628

PROFIT BEFORE TAX 16,760 19,314 17,404 16,502 27,485 35,353 41,040 49,939

Provision for Income Tax 8,121 8,985 7,029 7,838 13,055 16,793 19,494 23,721

Provision for Deferred Income Tax 808 317 1,129

- - -

-

-

PROFIT AFTER TAX FOR THE YEAR 7,830 10,012 9,246 8,663 14,430 18,560 21,546 26,218

Other comprehensive income/(loss) - -

Total Comprehensive Income for the Year

7,830 10,012 9,246 8,663 14,430 18,560 21,546 26,218

EPS (BDT) 130 166.9 51.4 48.1 80.2 103 120 146

Restated EPS (BDT) 43 55.6 51.4 48.1 80.2 103 120 146

DPS 60 50 40 43 70 90 110 140

Depreciation 1,496 1,693 1,482 1,990 2,022 1,990 1,934 1,873

EBIT 16,951 19,788 17,875 16,502 27,485 35,353 41,040 49,939

EBITDA 18,447 21,482 19,357 18,492 29,508 37,343 42,974 51,811

Blended Average Profit Per Stick 0.15 0.19 0.18 0.21 0.31 0.38 0.4 0.41

Blended Average Cost Per Stick 0.51 0.53 0.59 0.78 0.68 0.69 0.7 0.7

No. of Share Outstanding (mn) 60 60 180 180 180 180 180 180

No. of Share Outstanding (mn)- Current 180 180 180 180 180 180 180 180


Page 28 of 31


Statement of Financial Position

Particulars Year

2017A Year

2018A Year

2019A Year

2020E Year

2021E Year

2022E Year

2023E Year

2024E ASSETS:

Non-Current Assets: 20,915 26,484 31,204 28,784 27,977 27,202 26,483 25,825

Property, Plant and Equipment-Carrying Value 14,265 15,841 21,786 24,349 25,197 25,249 24,944 24,493 Asset Under Construction 6,650 10,643 7,746 4,436 2,780 1,953 1,539 1,332 Right of use of Assets* 1,672

Current Assets: 25,499 30,060 28,226 33,681 44,041 54,223 64,164 78,269

Inventories 17,469 19,429 16,538 25,472 29,999 32,513 35,361 45,451 Trade Debtors 2,315 4,174 2,610 2,654 3,203 3,726 4,240 5,093 Advances, Deposits and Prepayments 4,737 4,823 3,684 4,718 5,694 6,624 7,537 9,053 Cash and Cash Equivalents 978 1,634 5,394 838 5,146 11,360 17,026 18,672

TOTAL ASSETS 46,415 56,543 59,430 62,466 72,018 81,425 90,646 104,094

SHAREHOLDERS' EQUITY AND LIABILITIES:

Shareholders' Equity: 23,112 29,529 35,793 37,239 44,018 49,979 55,324 61,742

Share Capital 600 600 1,800 1,800 1,800 1,800 1,800 1,800 Capital Reserve 65 65 65 65 65 65 65 65 Retained Earnings/ Revenue Reserve 22,448 28,864 33,929 35,374 42,153 48,114 53,459 59,877

Non-Current Liabilities: 3,705 4,092 6,622 5,261 5,468 5,666 5,860 6,182

Net defined benefit plans 869 979 952 1,003 1,210 1,408 1,602 1,924 Lease liability 0 0 1,412 1,412 1,412 1,412 1,412 1,412 Deferred Tax Liability 2,836 3,113 4,259 4,259 4,259 4,259 4,259 4,259 Other Non-Current Liabilities 0 0 0

Current Liabilities: 19,597 22,923 17,014 18,554 21,119 24,368 28,050 34,758

Bank Overdraft 3,058 800 0 0 0 0 0 0 Short Term Bank Loans 0 4,380 0 0 0 0 0 0 Trade Creditors 10,102 10,518 12,237 12,748 12,789 13,478 15,013 17,791 Current Tax Liabilities 5,365 5,919 4,023 4,744 7,120 9,565 11,624 14,138 Provision for accruals 1,073 1,306 364 1,062 1,210 1,325 1,413 2,829 Obligation under finance lease 0 0 391 0 0 0 0 0

TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 46,415 56,543 59,430 62,466 72,018 81,425 90,646 104,094

Net Asset Value (NAV) per share 385.21 492.15 198.9 206.9 244.5 277.66 307.36 343.01

*included in other fixed assets components for the projected financial years


Page 29 of 31


Quarterly Income Statement

Particulars (BDT million) Quarters, 2017 Quarters, 2018 Quarters, 2019

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Quantity Sold 14,429 15,276 9,649 13,850 15,049 15,155 9,230 11,991 12,631 13,536 10,442 14,204

Gross Turnover 51,542 53,800 41,647 57,151 59,836 59,914 50,273 63,095 64,955 69,292 60,114 75,494 Less: VAT and SD 38,560 39,918 31,016 42,683 45,271 45,070 38,593 49,545 52,629 56,197 44,928 59,279

Net Turnover 12,982 13,883 10,631 14,468 14,566 14,844 11,680 13,550 12,325 13,095 15,186 16,215 Cost of Goods Sold 6,811 7,146 5,106 8,118 6,903 7,013 5,755 7,426 6,644 7,227 7,135 8,967

GROSS PROFIT 6,171 6,736 5,526 6,350 7,663 7,832 5,925 6,124 5,681 5,868 8,051 7,248 Operating Expenses: 1,358 1,640 1,289 2,693 1,499 1,448 1,794 1,982 1,244 2,269 1,798 2,771

Selling and Distribution Expenses 1,358 1,640 1,289 2,693 1,499 1,448 1,794 1,982 1,244 2,269 1,798 2,771 Administrative Expenses 0 0 0 0 0 0 0 0 0 0

PROFIT FROM OPERATIONS 4,813 5,097 4,237 3,656 6,164 6,384 4,131 4,142 4,437 3,599 6,253 4,477 Financial Expenses 0 30 115 48 31 142 190 111 41 168 228 34 Interest Income 1 0 0 5 0 0 0 0 0 0 0 0 Other Non-Operating Income 9 0 29 11 5 31 0 -36 5 9 35 -24 Other Non-Operating Expenses 0 25 0 0 0 0 124 -109 0 0 0 0 Share on profit (loss) on associate (net of tax)

0 0 0 0 0 0 0 0 0 0 0 0

PROFIT BEFORE WPPF 4,823 5,042 4,151 3,625 6,138 6,273 3,816 4,104 4,401 3,440 6,060 4,419 Allocation for WPPF 241 251 209 181 307 314 191 205 220 172 303 221

PROFIT BEFORE TAX 4,582 4,791 3,942 3,444 5,831 5,959 3,625 3,899 4,181 3,268 5,757 4,198 Provision for Income Tax 2,146 2,776 1,922 1,278 3,068 2,765 1,429 1,722 2,017 1,616 2,799 597 Provision for Deferred Income Tax 243 128 36 402 13 118 150 36 105 -99 297 826

PROFIT AFTER TAX FOR THE YEAR 2,194 1,888 1,985 1,763 2,749 3,075 2,046 2,141 2,059 1,751 2,661 2,776 Effective Tax Rates 52.1% 60.6% 49.7% 48.8% 52.9% 48.4% 43.6% 45.1% 50.7% 46.4% 53.8% 33.9% EPS- Restated 12.19 10.49 11.03 9.80 15.27 17.09 11.37 11.90 11.44 9.73 14.78 15.42


Page 30 of 31


Key Performance Indicators

Particulars Year 2016 Year 2017 Year 2018 Year 2019 Year 2020 Year 2021 Year 2022 Year 2023 Year 2024

Liquidity Ratios: Current Ratio 1.5 1.3 1.3 1.7 1.8 2.1 2.2 2.3 2.3 Quick Ratio 0.2 0.2 0.3 0.5 0.2 0.4 0.6 0.8 0.7

Operating Efficiency Ratios

Inventory Turnover Ratio 2.1 1.7 1.5 1.7 1.5 1.2 1.1 1.1 1.1 Receivable Turnover Ratio 43.7 30.8 16.8 16.8 22.4 24.3 23.9 23.7 24.3 Average Collection Period (Days) 8.2 11.7 21.4 21.5 16.1 14.8 15.1 15.2 14.8 Inventory Conversion Period(Days) 169.8 208.3 245.1 216.0 237.3 312.3 333.9 325.5 327.1 Operating Cycle (Days) 178.0 220.0 266.5 237.5 253.3 327.1 349.0 340.7 341.9 A/C Payable Turnover Ratio 3.0 3.0 2.6 2.6 2.6 2.5 2.6 2.6 2.7 Payables Payment Period (Days) 121.0 121.3 137.0 136.7 141.1 143.8 140.3 136.6 132.8 Cash Conversion Cycle (Days) 57.0 98.6 129.5 100.8 112.2 183.3 208.7 204.1 209.1 Total Asset Turnover 1.3 1.3 1.1 1.0 1.0 1.1 1.1 1.1 1.2 Fixed Asset Turnover 3.6 3.8 3.6 3.0 2.6 2.9 3.3 3.8 4.6

Operating Profitability Ratios

Gross Profit Margin (GPM) 45.4% 47.7% 50.4% 47.3% 46.0% 55.1% 59.3% 60.2% 60.7% Operating Profit Margin (OPM) 31.8% 34.3% 38.1% 33.0% 29.5% 40.6% 44.9% 45.9% 46.5% EBITDA Margin 33.1% 35.5% 39.3% 34.1% 31.4% 41.5% 45.1% 45.6% 45.8% EBIT Margin 30.2% 32.6% 36.2% 31.5% 28.0% 38.6% 42.7% 43.6% 44.1% Pre Tax Profit Margin 30.1% 32.3% 35.3% 30.6% 28.0% 38.6% 42.7% 43.6% 44.1% Net Profit Margin (NPM) 17.3% 15.1% 18.3% 16.3% 14.7% 20.3% 22.4% 22.9% 23.2% Return on Total Assets (ROA) 23.4% 19.2% 19.4% 15.9% 14.2% 21.5% 24.2% 25.0% 26.9% Return on Equity (ROE) 45.3% 37.3% 38.0% 28.3% 23.7% 35.5% 39.5% 40.9% 44.8%

Leverage Ratios

Total Debt to Equity* 9.5% 13.2% 17.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt to Total Assets* 5.1% 6.6% 9.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Coverage Ratios

Times Interest Earned (TIE) 261.8 88.4 41.8 37.9 - - - - -

Valuation Ratios

P/B (price to book) Ratio 7.9 8.8 7.2 4.9 5.7 4.8 4.2 3.8 3.4 Book Value Per Share 314.7 385.2 492.1 198.9 206.9 244.5 277.7 307.4 343.0 EPS 126.4 130.5 166.9 51.4 48.1 80.2 103.1 119.7 145.7 Dividend per Share 60.0 60.0 50.0 40.0 42.5 70.0 90.0 110.0 140.0 Dividend Payout Ratio 47.5% 46.0% 30.0% 77.9% 88.3% 87.3% 87.3% 91.9% 96.1% Retention Rate 52.5% 54.0% 70.0% 22.1% 11.7% 12.7% 12.7% 8.1% 3.9% P/E Ratio 19.7 26.1 21.2 18.9 24.5 14.7 11.4 9.9 8.1 Price/Sales 3.4 3.9 3.9 3.1 3.6 3.0 2.6 2.3 1.9 Sales/ Share 729.2 866.1 910.7 315.7 327.6 395.4 460.0 523.4 628.7

Growth Rates

Volume Sales 13.6% 10.1% -3.3% -1.2% -20.0% 15.7% 4.1% 10.3% 17.6% Gross Revenue 15.3% 23.3% 14.2% 15.8% -7.9% 18.5% 8.7% 7.9% 12.3% Net Sales 9.7% 18.8% 5.1% 4.0% 3.8% 20.7% 16.3% 13.8% 20.1% Net Domestic Cigarette Sales 11.2% 18.1% 5.0% 1.1% 3.1% 10.5% 5.4% 5.7% 9.4% Leaf Export revenue growth -21.4% 37.3% 8.2% 70.3% 6.4% 5.0% 5.0% 5.0% 5.0% EBIT 4.9% 28.2% 16.7% -9.7% -7.7% 66.6% 28.6% 16.1% 21.7% EBITDA 6.8% 27.4% 16.5% -9.9% -4.5% 59.6% 26.6% 15.1% 20.6% Gross Profit 6.3% 24.8% 11.1% -2.5% 1.0% 44.6% 25.3% 15.4% 21.2% Net Income 29.1% 3.3% 27.9% -7.6% -6.3% 66.6% 28.6% 16.1% 21.7% Total Asset 19.5% 31.3% 21.8% 5.1% 5.1% 15.3% 13.1% 11.3% 14.8%

Other Data

Stock price- Period End 2,483.0 3,401.6 3,541.7 969.9 - - - - - Number of shares outstanding ('000)

60.0 60.0 60.0 180.0 180.0 180.0 180.0 180.0 180.0

EBITDA ('000) 14,483.0 18,447.0 21,482.0 19,357.0 18,492.0 29,508.0 37,343.0 42,974.0 51,811.0


Page 31 of 31


Year 2016 Year 2017 Year 2018 Year 2019 Year 2020 Year 2021 Year 2022 Year 2023 Year 2024 DUPONT ANALYSIS Net Profit AT/Sales 17.3% 15.1% 18.3% 16.3% 14.7% 20.3% 22.4% 22.9% 23.2% Sales/Total Assets 134.8% 127.1% 106.1% 98.0% 96.8% 105.8% 107.9% 109.5% 116.2% ROA 23.4% 19.2% 19.4% 15.9% 14.2% 21.5% 24.2% 25.0% 26.9% Net Profit AT/Total Assets 23.4% 19.2% 19.4% 15.9% 14.2% 21.5% 24.2% 25.0% 26.9% Total Assets/Stockholders’. Equity 193.9% 194.7% 195.6% 177.5% 166.9% 165.5% 163.2% 163.4% 166.4% ROE 45.3% 37.3% 38.0% 28.3% 23.7% 35.5% 39.5% 40.9% 44.8%

Formulas Used 1. 𝐸𝑃𝑆 = 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥 ÷ 𝑁𝑜. 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 2. 𝐸𝐵𝐼𝑇 = 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 + 𝑇𝑎𝑥 3. 𝐸𝐵𝐼𝑇𝐷𝐴 = 𝐸𝐵𝐼𝑇 + 𝐷𝑒𝑝𝑟𝑖𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 4. 𝐴𝑣𝑔. 𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆𝑡𝑖𝑐𝑘 = 𝐺𝑟𝑜𝑠𝑠 𝐶𝑖𝑔𝑎𝑟𝑒𝑡𝑡𝑒 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 ÷ 𝑁𝑜. 𝑜𝑓 𝐶𝑖𝑔𝑎𝑟𝑒𝑡𝑡𝑒 𝑆𝑜𝑙𝑑 5. 𝐴𝑣𝑔. 𝑁𝑒𝑡 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑃𝑒𝑟 𝑆𝑡𝑖𝑐𝑘 = 𝑁𝑒𝑡 𝐶𝑖𝑔𝑎𝑟𝑒𝑡𝑡𝑒 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 ÷ 𝑁𝑜. 𝑜𝑓 𝑆𝑡𝑖𝑐𝑘𝑠 𝑆𝑜𝑙𝑑 6. 𝐵𝑙𝑒𝑛𝑑𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑟𝑜𝑓𝑖𝑡 𝑃𝑒𝑟 𝑆𝑡𝑖𝑐𝑘 = 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑡 ÷ 𝑁𝑜. 𝑜𝑓 𝐶𝑖𝑔𝑎𝑟𝑒𝑡𝑡𝑒 𝑆𝑜𝑙𝑑 7. 𝐵𝑙𝑒𝑛𝑑𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 𝑃𝑒𝑟 𝑆𝑡𝑖𝑐𝑘 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 ÷ 𝑁𝑜. 𝑜𝑓 𝐶𝑖𝑔𝑎𝑟𝑒𝑡𝑡𝑒 𝑆𝑜𝑙𝑑 8. 𝑁𝐴𝑉𝑃𝑆 = 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 ÷ 𝑁𝑜. 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 9. 𝑅𝑂𝐴 = 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 ÷ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 10. 𝑅𝑂𝐸 = 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 ÷ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 11. 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 ÷ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 12. 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 = 𝑁𝑒𝑡 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 ÷ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 13. 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 (𝐷𝑎𝑦𝑠) = 360 ÷ 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 14. 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑(𝐷𝑎𝑦𝑠) = 360 ÷ 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 15. 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑦𝑐𝑙𝑒 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 + 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 16. 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 ÷ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 17. 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 (𝐷𝑎𝑦𝑠) = 360 ÷ 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 18. 𝐶𝑎𝑠ℎ 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝐶𝑦𝑐𝑙𝑒 (𝐷𝑎𝑦𝑠) = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑦𝑐𝑙𝑒 − 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 19. 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑁𝑒𝑡 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 ÷ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 20. 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝑁𝑒𝑡 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 ÷ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡 21. 𝑇𝑖𝑚𝑒𝑠 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 = 𝐸𝐵𝐼𝑇 ÷ 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 22. 𝑃𝐸𝐺 𝑟𝑎𝑡𝑖𝑜 = 𝑃/𝐸 𝑅𝑎𝑡𝑖𝑜 / 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒

Key Terminologies/ Acronyms:

1. BATBC= British American Tobacco Bangladesh Company Ltd.

2. CAGR=Compound Annual Growth Rate 3. DCF: Discounted Cash Flow Valuation Method 4. DDM: Dividend Discount Model 5. Div. Yield = Dividend Yield Based on Historical

and Expected Fair Value per Share 6. DPS: Dividend Per Share 7. EBIT= Earnings before Interest and Tax 8. EBITDA= Earnings before Interest, Tax,

Depreciation & Amortization 9. EPS= Earnings per Share. 10. EV=Enterprise Value 11. FMCG=Fast Moving Consumer Goods 12. FCFF: Free Cash flow To Firm

13. Free Float Share= Total shareholding- Sponsor or directors holding

14. GDP= Gross Domestic Product 15. LTM: Trailing 12 Months 16. LTU-VAT-NBR=Large Taxpayers Unit, Value

Added Tax, National Board of Revenue 17. NAVPS= Net Asset Value Per Share 18. NPAT: Net Profit after Tax 19. OPEX= Operating Expenditure

20. PBT: Profit Before Tax 21. ROA= Return on Average Assets 22. ROE= Return on Average Equity 23. Others: Q = Quarter, mn= Million, bn=Billion A. = Actual, E. = Expected, YoY= Year on Year

IMPORTANT DISCLOSURES

Disclaimer: This document has been prepared by the Research Team of EBL Securities Limited (EBLSL) for information purpose only of its clients residing both in Bangladesh and abroad, on the basis of the publicly available information in the market and own research. This document does not solicit any action based on the material contained herein and should not be taken as an offer or solicitation to buy or sell or subscribe to any security. Neither EBLSL nor any of its directors, shareholders, member of the management or employee represents or warrants expressly or impliedly that the information or data or the sources used in the documents are genuine, accurate, complete, authentic and correct. However all reasonable care has been taken to ensure the accuracy of the contents of this document. Being a broker, EBLSL may have a business relationship with the public companies from time to time. EBLSL and its affiliates, directors, management personnel and employees may have positions in, and buy or sell the securities, if any, referred to in this document. EBLSL disclaims liability for any direct, indirect, punitive, special, consequential, or incidental damages related to the report or the use of the report.

This document is not directed to, or intended for distribution to or use by, any person or entity that is citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. The information and data presented herein are the exclusive property of EBLSL and any unauthorized reproduction or redistribution of the same is strictly prohibited. No part of this report should be copied or used in any other report or publication or anything of that sort without proper credit given or prior written permission taken from the authorized publisher of this report. This disclaimer applies to the report irrespective of being used in whole or in part.

Analyst Certification: The person or persons named as the author(s) of this report hereby certify that the recommendations and opinions expressed in the research report accurately reflect their personal views about the subject matter(s) discussed. The views of the author(s) do not necessarily reflect the views of the EBL Securities Limited (EBLSL) and/or any of its salespeople, traders and other professionals and are subject to change without any prior notice. All reasonable care has been taken to ensure the accuracy of the contents of this document and the author(s) will not take any responsibility for any decision made by investors based on the information herein.

Compensation of Analyst(s): The compensation of research analyst(s) is intended to reflect the value of the services they provide to the clients of EBLSL. The compensation of the analysts is impacted by the overall profitability of the firm. However, EBLSL and its analyst(s) confirms that no part of the analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations, opinions or views expressed in the research reports.

General Risk Factors: The information provided in the report may be impacted by market data system outages or errors, both internal and external, and affected by frequent movement of market events. The report may contain some forward looking statements, projections, estimates and forecasts which are based on assumptions made and information available to us that we believe to be reasonable and are subject to certain risks and uncertainties. There may be many uncontrollable or unknown factors and uncertainties which may cause actual results to materially differ from the results, performance or expectations expressed or implied by such forward-looking statements. EBLSL cautions all investors that such forward-looking statements in this report are not guarantees of future performance. Investors should exercise good judgment and perform adequate due-diligence prior to making any investment. All opinions and estimates contained in this report are subject to change without any notice due to changed circumstances and without legal liability. However, EBLSL disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the publication of this report to reflect the occurrences and results of unanticipated events.

For U.S. persons only: This research report is a product of EBL Securities Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

This report is intended for distribution by EBL Securities Ltd. only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.

EBLSL Rating Interpretation

Overweight : Stock is expected to provide positive returns at a rate greater than its required rate of return Accumulate : Stock is expected to provide positive inflation adjusted returns at a rate less than its required rate of return Market weight : Current market price of the stock reasonably reflect its fundamental value Underweight : Stock expected to fall by more than 10% in one year Not Rated : Currently the analyst does not have adequate conviction about the stock's expected total return

About EBL Securities Ltd.: EBL Securities Ltd. (EBLSL) is one of the fastest growing full-service brokerage companies in Bangladesh and a fully owned subsidiary of Eastern Bank Limited. EBLSL is also one of the top five leading stock brokerage houses of the country. EBL Securities Limited is the TREC-holder of both exchanges of the country; DSE (TREC# 026) and CSE (TREC# 021). EBLSL takes pride in its strong commitment towards excellent client services and the development of the Bangladesh capital markets. EBLSL has developed a disciplined approach towards providing capital market services, including securities trading, margin loan facilities, depository services, foreign trading facilities, Bloomberg Terminal, online trading facilities, research services, panel brokerage services, trading through NITA for foreign investors & NRBs etc.

EBLSL Key Management

Md. Sayadur Rahman Managing Director [email protected] Md. Humayan Kabir SVP & Chief Operating Officer (COO) [email protected]

EBLSL Research Team

M. Shahryar Faiz FAVP & Head of Research [email protected] Mohammad Asrarul Haque Research Analyst [email protected] Mohammad Rehan Kabir Senior Research Associate [email protected] Arif Abdullah Research Associate [email protected] Farzana Hossain Laizu Junior Research Associate [email protected] Md Rashadur Rahman Ratul Junior Research Associate [email protected]

EBLSL Institutional & Foreign Trade Team

Asif Islam Associate Manager [email protected]

For any queries regarding this report: [email protected]

EBLSL Research Reports are also available on www.eblsecurities.com > Research

Our Global Research Distribution Partners

To access EBLSL research through Bloomberg use <EBLS>

Our Locations

Head Office:

Jiban Bima Bhaban,

10 Dilkusha C/A, 1st Floor,

Dhaka-1000

+8802 9553247, 9556845

+8802 47111935 FAX: +8802 47112944 [email protected]

HO Extension-1:

Modhumita Building 160 Motijheel C/A, 2nd Floor, Dhaka-1000. +88 02 9569480, 9564393, +88 02 8825236

HO Extension-2:

Bangladesh Sipping Corporation (BSC) Tower 2-3, Rajuk Avenue (4th floor), Motijheel, Dhaka-1000 +880257160801-4

Chattogram Branch:

Suraiya Mansion (6th Floor); 30, Agrabad C/A Chattogram-4100 +031 2522041-43

Dhanmondi Branch:

Sima Blossom, House # 390 (Old), 3 (New), Road # 27 (Old), 16 (New),Dhanmondi R/A, Dhaka-1209. +8802-9130268, +8802-9130294











http://www.eblsecurities.com/

https://www.refinitiv.com/en

valuation update british american tobacco bangladesh

Documents