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Fundamental Analysis for BRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD

Company Name: Board:

Stock Code (Bursa): FBMKLCI: TRUE

Bloomberg: Reuters: BATO.KL

Industry:

Sub-Sector:

Company Description:

Date of Analysis: Price: 53.8

Financial Year: Stock Grade:

Profitability 3

Financial Health 4

Growth 1

Management 5

Potential Risk 3

Main BoardBRITISH AMERICAN TOBACCO (MALAYSIA) BERHAD

BAT

ROTH:MK

CONSUMER PRODUCTS

TOBACCO COMPANIES

MANUFACTURE; IMPORTATION & SALE OF CIGARETTES PIPE TOBACCOS & CIGARS.

Large Capital Growing

26-Mar-12

2011 12/31/2011

0

1

2

3

4

5Profitability

FinancialHealth

GrowthManagement

Potential Risk

Fundamental Analysis

All figures in millions of Ringgit Malaysia except per share values and ratio

I R

2002

@ 2002/12/31

2003

@ 2003/12/31

2004

@ 2004/12/31

2005

@ 2005/12/31

2006

@ 2006/12/31

2007

@ 2007/12/31

2008

@ 2008/12/31

2009

@ 2009/12/31

2010

@ 2010/12/31

2011

@ 2011/12/31

3,073 3,200 3,264 3,564 3,612 3,831 4,135 3,923 3,965 4,127

663 758 782 593 720 732 812 747 731 720

2.32 2.66 2.74 2.08 2.52 2.56 2.84 2.62 2.56 2.52

44.40% 45.87% 46.64% 40.74% 42.35% 40.93% 40.38% 39.36% 37.54% 36.15%

30% 33% 33% 23% 28% 26% 26% 26% 24% 23%

22% 7% 21% 12% 17% 17% 12% 8% 9% 16%

2002

@ 2002/12/31

2003

@ 2003/12/31

2004

@ 2004/12/31

2005

@ 2005/12/31

2006

@ 2006/12/31

2007

@ 2007/12/31

2008

@ 2008/12/31

2009

@ 2009/12/31

2010

@ 2010/12/31

2011

@ 2011/12/31

716 977 859 734 836 837 955 924 876 808

140% 185% 169% 135% 182% 290% 266% 229% 196% 221%

58.72% 70.11% 74.08% 57.73% 70.98% 74.72% 83.42% 83.04% 95.66% 95.18%

1.14 1.33 1.09 1.13 1.27 2.17 1.60 1.48 1.33 1.51

1.07 0.59 1.18 1.22 0.50 0.79 0.55 1.13 1.40 0.62

27 17 21 23 27 19 22 15 5 3

22% 28% 24% 18% 21% 21% 21% 21% 22% 18%

Measures

Consistently increasing sales revenue

Consistently increasing Net Cash from

Operations

Comments

Consistently increasing EPS

Profitability

Consistently increasing Net Income After Tax

Financial Health

Consistently increasing Gross Profit Margin

(Preferably > 40%)

Consistently increasing Quick Ratio

(Preferably > 1, but ≤ 2.5)

Consistently increasing Net Profit Margin

(Preferably > 10%)

Consistently declining Debt/Equity Ratio

(Preferably < 1)

Consistently increasing ROIC (Preferably >

15%)

Consistently decreasing Accrual Ratio

(Preferably < -5%)

Consistently increasing high ROE (Preferably

> 15%)

Consistently increasing Free Cash Flow /

Sales (Preferably > 5%)

Short & declining "Cash Conversion Cycle"

2% 2% 3% 90%

-2% -1% 0% 0%

-1% 0% 1% 6%

-4% -1% 1% 6%

2002

@ 2002/12/31

2003

@ 2003/12/31

2004

@ 2004/12/31

2005

@ 2005/12/31

2006

@ 2006/12/31

2007

@ 2007/12/31

2008

@ 2008/12/31

2009

@ 2009/12/31

2010

@ 2010/12/31

2011

@ 2011/12/31

9.17 9.99 11.16 10.18 10.99 11.14 11.90 12.28 11.83 11.88

N/A -2.69 -2.88 -2.99 -2.87 -2.94 -2.52 -3.29 -2.96 -2.82

I - Importance; R - Rating

GrowthQuality of Historical Growth

Operating Income CAGR:

Revenue CAGR:

Net Cash From Operations CAGR:

EPS CAGR:3Y: 5Y: 10Y: Regression:

Fitch Ratings says the outlook for global tobacco companies in 2012 is stable, based on evidence of good pricing power, scope for further cost rationalisation and manageable levels of dividend payments

and share repurchases.

Despite the expectation of continuing regulatory pressure, elevated packaging and distribution costs and, for the international market (excluding the US and China) an overall low single digit decline of

cigarette volumes sold, Fitch believes that global tobacco companies should maintain low single-digit organic revenue growth and at least mid-single profit growth in 2012.

The concentrated structure of national tobacco markets, combined with low price elasticity by consumers and most governments' preference to avoid abrupt excise duty increases supports the pricing

power of industry players.

Tobacco companies maintain some of the highest dividend payouts across the corporate universe. Among international companies, this ranges between the 50% of Imperial Tobacco and the 65% of PMI

and BAT.

With credit protection measures expected to be comfortable at year-end 2011 for PMI, BAT, Imperial and JT's ratings and 2012 post dividend free cash flow (FCF) projected to remain abundant,

companies that have a share buyback programme in place are likely to maintain or increase this type of spending. However, Fitch expects companies to cap any step up in share buyback spending at a

level that allows them to maintain headroom within their current rating levels.

Fitch views large acquisitions as the only event likely to drive tobacco companies to downsize their share repurchase spending. However, while the four leading global players PMI, BAT, Imperial and JT

have the ambition to act as industry consolidators, larger acquisition opportunities remain rare and are treated by Fitch as event risk.

Transparency

Strong future growth drivers

ManagementManagement and Institutional Investors are

Holding/Buying Stock

Refer to Stewardship Grades

Shareholder Friendliness

Increasing Altman Z Score (Preferably ≥ 2.6)

Incentives, Ownership, and Stewardship

BRITISH AMERICAN TOBACCO HOLD (M) B.V. is the major shareholder.

Potential Risks Despite the expectation of continuing regulatory pressure, elevated packaging and distribution costs and, for the international market (excluding the US and China) an overall low single digit decline of

cigarette volumes sold, Fitch believes that global tobacco companies should maintain low single-digit organic revenue growth and at least mid-single profit growth in 2012.

Declining Beneish Score (Preferably < -2.22)

Stewardship Grades

No. Question I R Comments

1 Does the company overuse "one-time" charges or write-offs? In public announcements,

does it consistently disregard GAAP earnings and point to pro forma numbers (i.e., figures

"excluding charges...")?

2 Does the firm have aggressive accounting? For example, has there been a major change to

accounting practices, such as revenue recognition, during the past three years that may

have been intended to hide something?

3 Has the company recently restated earnings for any reason other than compliance with an

accounting rule change? Has the company had an unexplained delay in making regulatory

filings or reporting quarterly results?

4 Does the company grant options without expensing them?

5 Does the company choose not to provide any balance sheet with its quarterly earnings

release?

6 Bonus: Does the company's disclosure go above and beyond what its competitors

provide?

7 Does the company have a separate voting class of shares that an insider controls?

8 Does the company have takeover defenses in place that, if exercised, would significantly

dilute existing shareholders or favor the interests of management over shareholders in a

takeover situation?

9 Has a majority vote of shareholders on a proposal been thwarted by any of the following:

(a) management inaction; (b) management interference in the ballot process; or (c) the

existence of a supermajority provision?

10 Are the chairman of the board and the CEO the same person?

11 Has the board or management engaged in significant related-party transactions that cast

doubt on its ability to act in shareholders' best interests?

12 Bonus: Is there cumulative voting (i.e., are shareholder votes equal to shares owned times

number of directors)?

13 Has the board agreed to a compensation structure that rewards management merely for

being employed, rather than for making value-enhancing decisions?

14 Over the past three years, has the firm given away more than 3% of shares annually as

options?

15 In bad times, has the board granted "one-time" "retention bonuses," redefined

management goals midstream, repriced options, or bestowed other "extraordinary"

perks?

16 Is the CEO's equity stake in the company (including options) too small to align his or her

interests with shareholders'?

17 Do directors receive a substantial portion of their compensation in cash, rather than

stock?

18 Do the goals set out for top management by the board's compensation committee

encourage short-term actions rather than long-term value creation? Is the board's

disclosure of such goals insufficient, too generic, or too fuzzy to allow you to answer the

preceding question?

19 Given the company's financial performance, the board's and management's past actions,

and the above factors, is management inappropriately motivated and/or rewarded?

20 Bonus: Does the board and management have a substantial track record of doing right by

shareholders?

I - Importance; R - Rating

Transparency

Shareholder Friendliness

Incentives, Ownership, and Stewardship

Investment Strategy

Position Strategy

Position

Strategy:

Buy Criteria

I

Sell Criteria

VI

Lump Sum Not ApplicableAveraging Down

Method:

3. Quarterly EPS drop for 5 consecutive months

Criteria Remarks1. The current quarter's EPS is up more than 15% from

the same quarter the year before.

2. Price is below Intrinsic Value

4. Fundamental of business turns unattractive or bad

3. Current EY% or Rolling 4Q EY% > 6%

4. Current DY% or Rolling 4Q DY% > 6%

5. Stock price breaks out of consolidation/dip on an

uptrend.

Criteria1. Current EY% or Rolling 4Q EY% < 6% for more than 2

years

Remarks

2. Current DY% or Rolling 4Q DY% < 6% for more than 2

years

9. Did I make a mistake?

10. Has the stock risen too far from its intrinsic value?

6. Comparison of P/B ratio (for Financial stocks only)

7. Company owner, EPF, Khazanah and PNB heavily

buying

8. Company owner, EPF, Khazanah and PNB heavily

selling.

5. Found a better opportunity to replace this stock

7. Long term trend changed from bullish to bearish

6. The stock drops near to my average cost or hit my

stop loss

Discounted Cash Flows Valuation 13

11

Shares Out. M. O. S. Sustainable

Growth (for

reference)

Growth % (for

DCF Calc.)

Average risk

premium

Average

Risk free

rate

Discount % Terminal % 2011 FCF Excess Cash Intangibles

Assets

Intangibles%

add to DCF

Decay Rate

(Yr4E-Yr7E)

Extra Decay

(Yr8E-Yr10E)

Default Value 285.50 20% 8% 10.5% 2% 768.76 0% 8% 15%

Custom Value 2% 8.50%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Yearly Growth

Future Value 784.13 799.82 815.81 826.92 842.14 857.63 873.41 870.38 883.99 897.82

Discounted

Perpetuity Value

10,022.79 8,788.62 6,231.29

Present Value 12,370.13 12,292.71 12,028.95

3-Y 5-Y 10-Y

Shares Outstanding

43.33 43.06 42.13

Desired M.O.S.

34.66 34.45 33.71

Current Price 53.8 53.8 53.8

Actual M.O.S. -24% -25% -28%

411.625.50% 5.00% 306.52

Projection of Future Free Cash Flow

42%

285.50

20%

Fair Value

Buy Under

Valuation 3-Y 5-Y 10-Y

Fair Value 43.33 43.06 42.13

Actual M.O.S. -24% -25% -28%

Buy Under 34.66 34.45 33.71

Selection

Valuation by Price-to-book Ratio: 1.63 55

CU EY%: 4.83 R-4Q EY%: 4.76

CU DY%: 4.53 R-4Q DY%: 4.64

57

CU CR%: 5% MRQ CR%: 5%

Sep-10 Dec-10 Mar-11 Jun-11 Dec-11

959 992 1,043 1,105 987

183 179 184 176 181

0.64 0.63 0.65 0.62 0.63

Current Cash Return% or MRQ Cash Return% > 6%

Current EY% or Rolling 4Q EY% > 6%

Current DY% or Rolling 4Q DY% > 6%

Market Timing Analysis

Discounted Cash Flow

Price-to-book Ratio

3-Y: Fast-growing company; operates in highly competitive, low margin industry

5-Y: Solid company; operates with advantage such as strong marketing channels, recognizable brand name, or

regulatory advantage

10-Y: Outstanding growth company; operates with very high barriers to entry, dominant market position or

prospects

Quarterly Financial Performance

Increasing revenue

Increasing net profit

Increasing EPS

Dec-11's EPS ≥ 15% from

Sep-10

-1%