Analyst: Mohammad Asrarul Haque [email protected] Phone: +8801753509329 British American Bangladesh Company Limited Valuation Update (15 February 2021) DSE: BATBC; BLOOMBERG: BATB:BD Current Market Price: BDT 1,554.7 Sector: Food & Allied Rating: Over-weight Upside Potential: Target Fair Value: BDT 1,734.0 (Pre-bonus adjustment) 11.5% (Based on Fair Price); BDT 578.0 (after adjustment) Exp. Dividend Yield: 1.9% Ref. Floor Price: BDT 907.6 (before record date)

Our December 2020 target price for BATBC stocks published on 16 June Industry Tobacco 2020 has been achieved with insignificant deviation. Meanwhile, the

company also declared higher dividend compared to our expectation. Market Cap (mn) BDT: 279,846; USD: 3,300 BATBC prefers higher payout at times of low capex requirement. BATBC’s Paid-up Capital 1,800 Rating Validity June 2021 200% bonus dividend declaration was also aligned with our prior forecast stated on our valuation report dated March 12, 2019, when BATBC 52W High-Low 1,799.7-821.6 increased their Authorized Capital to BDT 5,400.0 from prior BDT 600.0 Forward PE 25.7 million and announced 200% bonus for 2018 earnings. Forward PB 8.2 However, BATBC outperformed our EPS projection for 2020, as COVID-19 Current no. of shares 180 mn could have lower than expected disturbance on the operations of the Bonus adjusted no. of shares 540 mn company and the company also strategically deferred/ minimized some of 2018A 2019A 2020E 2021E the major expenses that led to significant margin improvement. Financial Information (BDT mn): Indicators (in mn) 2020 2020 Actual Deviation Net Sales 54,640 56,821 60,654 80,515 Projected Gross Profit 27,543 26,849 30,071 44,959 Target Price 1,180.0 1,180.8 0.07% EBITDA 21,482 19,357 23,131 34,346 EPS (BDT) 55.2 60.5 9.60% NAVPS (BDT) 214.0 188.9 -11.73% EBIT 19,788 17,875 20,736 32,059 Profit After Tax 10,012 9,246 10,886 16,831 Key Catalyst Total Assets 56,543 59,430 65,293 76,548  Price-led revenue growth despite lower volume sales. Total Debt 5,180 1,803 1,803 1,803  Continued production during country wide semi-locked down Total Equity 29,529 35,793 39,461 45,492 period. Retained Earnings 28,864 33,929 37,597 40,027  Commencement of export along with recent capacity Cash 1,634 5,394 3,243 6,957 expansion to drive future growth. Dividend (C/B)% 500/200 400/0 600/200 300/0  Waiver of export duty on export of tobacco and related Margin: products.  Low price elasticity of high segment . EBITDA 39.3% 34.1% 38.1% 42.7% EBIT 36.2% 31.5% 34.2% 39.8%  Potential for upside price revision in upcoming national budget Net Profit 18.3% 16.3% 17.9% 20.9% announcement.

Growth (YoY): Risk Factor Net Sales 5.1% 4.0% 6.7% 32.7%  Risk of higher supplementary duty on low segment tobacco EBITDA 16.5% -9.9% 19.5% 48.5% products can affect projected growth and profitability. EBIT 16.7% -9.7% 16.0% 54.6%  Increased health awareness in post COVID-19 era and growing Net Profit 27.9% -7.6% 17.7% 54.6% pressure from anti-tobacco campaigns might result in lower Profitability: consumer expenditure on tobacco related products. ROAA 19.4% 15.9% 17.5% 23.7%  Growing competition from illegal and smuggled ROAE 38.0% 28.3% 28.9% 39.6% brands, competition from international and small players Payout Ratio 30.0% 77.9% 99.2% 96.3% without maintaining proper compliance.  Any large retail price hike in upcoming national budget Leverage: Debt Ratio 9.2% 0.0% 0.0% 0.0% announcement might affect volume sales. Debt-Equity 17.5% 0.0% 0.0% 0.0%  Potential of illiquidity of shares after dividend adjustment due Valuation: to ref. floor price. However, regulator has directed to revise Res. EPS (BDT)^ 55.6 51.4 60.5 93.5 floor prices for bonus shares based on adjusted price after Actual EPS (BDT) 166.9 51.4 60.5 31.2 record date.  NAVPS (BDT) 492.15 198.9 188.9> 84.2 The Government has filed review petitions against the judgment passed by the Appellate Division of the Supreme P/E (x) 21.2 18.9 19.5 18.2 Court of Bangladesh regarding BDT 17,806 million tax claim. P/NAV (x) 7.2 4.9 8.5> 6.7 Any unfavorable verdict may led to significant cash outlay. EV/EBITDA 9.8 8.8 8.8 8.5 We have updated our valuation model based on recent disclosures, Price/Sales 3.9 3.1 3.5 3.8 assessing the recent performance of the company, macro-economic and *SOURCE; BATBC DISCLOSURES & EBLSL RESEARCH; industry outlook etc. We are assigning ‘Over-weight’ rating on BATBC ** KEY TERMINOLOGIES ARE PRESENTED AT THE END OF THE REPORT with June 2020 fair value based target price of BDT 567 per share. Our ^BASED ON 180 MN NUMBER OF SHARES target price can yield 13.5% total return on BATBC without considering > AS PER LATEST AUDITED DECLARATION implication of floor price.

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

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 and tobacco brands sold in over 200 markets around the world. The year 2020 was a challenging year for the British American Tobacco Company Limited. With country-wide general holidays and restrictions on public movement to control the spread of global pandemic COVID-19 has posed some challenges to the operation of the company. However, the government allowed the The year 2020 was a challenging year company to continue cigarette manufacturing and distribution during the country-wide for BATBC driven by COVID-19 shut-down period. Historically, BATBC has unique capability and expertize in turning every pandemic. However, with strategic crisis into an opportunity and the performance of the year 2020 also resembles the same. business operation and cost control Despite pandemic led volume sales drop during second and third quarter of the year, the company recording handsome BATBC recorded attractive growth in bottom-line as a result of significant margin bottom-line growth. improvement which was mainly driven by deferral of some major expenses during the pandemic. In 2019, 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 was also 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. With the same product mix and no major changes in retail prices, the company also outperformed in the 2020 with strategic operational focus, cost reduction and enhancing the foothold in the market. Looking forward, we expect increased volume sales driven by growing demand along with government led moderate price hike to drive growth in revenue of the company. Being the highest tax payer of the country, Government has indirect support for the uninterrupted operation of the company and we don’t foresee any adverse regulatory challenges in near future. The broad market significantly underperformed during 1st half of 2020 period driven by a number of factors including low market liquidity, fear of economic fallout after newly emerged COVID-19 pandemic etc. However, the market started to revive in second half of the year. BATBC outperformed the pandemic period compared to other industries and growth momentum is likely to sustain. 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 has helped BATBC to retain leadership position in the market for a long period of time. 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, has witnessed major influx of illegal cigarettes in Bangladesh market along with fresh investment by new multi-national company. 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.

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

Table of Contents

Synopsis 02

1.0 Investment Thesis 04

1.1 Valuation 04

1.2 Changes in Valuation Assumptions/ Inputs 08

2.0 Analysis on the Recent Financial and Operational Performance 10

3.0 Historical Performance Review of the Key Financials 13

4.0 Company Fundamental Review & Analysis 17

4.1 Shareholding Structure 17

4.2 Corporate Governance Assessment 18

4.3 Business overview- Key products offerings 19

4.4 Business overview- Raw-materials sourcing 20

5.0 Bangladesh Tobacco Industry Insights 20

6.0 Historical & Projected Financial Statements 26

7.0 Formulas & Acronyms 26

8.0 EBLSL General Disclosures 27

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

1.0 Investment Thesis

‘Over-weight’ rating with upward target price revision

With reference to our earlier equity valuation report published on 16th June 2020, we are retaining our rating to ‘Over-weight’ rating with an upward revision in the target fair price. BATBC is a comparatively low liquid company, however, issuance of 1:2 bonus share (200%) will result in significant improvement of liquidity in stock trading. However, pre- vailing floor price mechanism may cause the shares of the company to remain dry for a certain time period.

1.1 VALUATION Fairly valued based on both the DCF and Relative Valuation Matrices At current market price of BDT 1,554.7 per share, BATBC’s shares have a P/E multiple of 25.7 for its 2020 audited earnings as on 15 February 2021. Taking into consideration of a number of valuation multiples/ methods, fair value for BATBC stands at BDT1, 733.2 per share (before bonus adjustment) and BDT 577.7 per share (after bonus adjustment). Determination of fair value per share With Bonus adjustment Without Bonus adjustment Number of Shares (million) 540.0 180.0 Valuation Methods Estimated Value/Share 1. Discounted Cash Flow (FCFF) Method Valuation: a. Terminal Cash Flow Method 644.0 1,932.1 b. Terminal EV/EBITDA Method 695.9 2,087.6 2. Residual Income Method 587.4 1,762.1 3. Dividend Discount Model 658.8 1,976.4 3. Relative Valuation Method a. Historical Earnings, CF & BV based valuation 475.0 1,425.0 b. Historical Enterprise value based valuation 440.1 1,320.4 c. Selected FMCG Companies’ Avg. PE 542.9 1,628.6 Average Price Per Share 577.7 1,733.2

Current Price 518.20 1,554.70 June 2021 Target Price (Rounded) 578.0 1,734.0 Expected Capital Gain 11.53% 11.53% Expected Dividend Yield (Final) 1.9% 1.9% Holding Period Return (6 Months) 13.5% 13.5% Note: As per the BSEC Press Note dated 15 February 2020, the commission has decided to revise floor prices of listed corporation’s stock based on the adjusted diluted price of stocks after the record date.

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

Discounted Cash Flow Valuation: We have updated our DCF based valuation of BAT Bangladesh by forecasting Free Cash Flows up to 2025. To derive the intrinsic value of BAT Bangladesh, we estimated terminal value at the end of 2025 using- 1. Constant Growth Cash flow Method 2. EV/ EBITDA Exit Multiple Method Our DCF analysis with a discount rate of 10.47% & terminal growth rate of 3.5% and terminal EV/ EBITDA multiple of 8(x) gives us Enterprise Value of BDT 341.0 billion using the constant FCFF growth model and BDT 369.0 billion using Exit Multiple Method. The DCF based fair value using Constant Growth Cash Flow method stands at BDT 644.0 per share for the company and BDT 695.9 per share using Exit Multiple Method considering 540 million number of shares outstanding (bonus adjusted). (Figures in BDT million) 2020E 2021E 2022E 2023E 2024E 2025E Terminal DCF Valuation Based on Terminal Cash Flows Profit for the Year 10,886 16,831 21,154 26,469 29,199 29,035 Add: After Tax Interest Expenses 0 0 0 0 0 0 Add: Depreciation & Amortization 2,395 2,287 2,233 2,209 2,201 2,203 Less: Investment in NWC 6,008 2,512 214 735 -1,905 373 Less: Capital Expenditures 3,000 3,000 3,000 3,000 3,000 3,000 Free Cash Flow to the Firm 4,273 13,606 20,174 24,943 30,305 27,865 413,997 Discount Factor 1 0.9053 0.8195 0.7418 0.6716 0.6079 0.6079 Present Value Adjusted Free Cash flow to the Firm 4,273 12,317 16,532 18,504 20,352 16,940 251,681 Enterprise Value 340,598 Plus: Cash & cash equivalent 8,495 Less: Interest bearing debt 1,317 Equity Value 347,775 No. of Share Outstanding 540 Value per Share (BDT)- Bonus Adjusted 644.0 Value per Share (BDT)- At prevailing number of shares 1,932.1 DCF Valuation Based on using Exit Multiple Method Terminal Value with assumed EV/ EBITDA 0 0 0 0 0 0 460,058 Free Cash Flow to the Firm 4,273 13,606 20,174 24,943 30,305 27,865 Discount Factor 1.0000 0.9053 0.8195 0.7418 0.6716 0.6079 0.6079 Present Value of Explicit FCFF 88,917 Present Value of Terminal Value 279,682 Total Enterprise Value 368,599 Less: Debt 1,317 Add: Cash 8,495 Equity Value 375,777 Value per Share (BDT)- Bonus Adjusted 695.9 Value per Share (BDT)- At prevailing number of shares 2,087.65

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

h 650.3 9.80% 10.00% 10.30% 10.50% 11.00% 11.50% 12.00% 12.50% 2.00% 604 589 567 556 523 495 470 447 2.50% 635 618 594 582 545 514 487 463 2.75% 652 634 609 596 557 525 497 471 3.50% 712 690 660 644 598 561 528 499 4.00% 761 735 700 682 631 589 552 520

Terminal FCF Growt FCF Terminal 5.00% 888 853 805 781 711 657 611 570

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

Sensitivity Analysis-Exit Multiple Method 702.2 9.80% 10.00% 10.30% 10.50% 11.00% 11.50% 12.00% 12.50% 6 581 577 570 566 555 544 534 524 7 648 643 635 631 618 606 594 583 8 715 709 701 696 681 668 655 642

Terminal Terminal

EV/EBITDA 9 782 775 766 761 744 730 715 701 10 848 841 831 825 808 791 776 760

Residual Income Model

(Figures in BDT million) 2020 2021 2022 2023 2024 2025 Terminal Equity Charge 4,130 4,761 5,280 5,789 6,302 6,374 Residual Income 6,756 12,070 15,874 20,679 22,897 22,661 336,685 Book Value 37,315 Present Value of Residual Income 6,756 10,926 13,009 15,341 15,376 13,776 204,680 317,180 Value Per Share (based on 540 mn shares outstanding) 587.37

Sensitivity Analysis- Residual Income Model Discount Rates

h 587.4 9.8% 10.0% 10.3% 10.5% 11.0% 11.5% 12.0% 12.5% 2.50% 580 566 547 537 507 482 460 440 3.00% 609 593 572 560 527 500 476 454 3.25% 625 609 585 573 538 509 484 461 3.50% 643 625 600 587 550 520 493 469 4.00% 682 662 633 619 576 542 513 486

Terminal FCF Growt FCF Terminal 5.00% 786 757 718 698 642 598 560 527

Dividend Discount Model (Figures in BDT million) 2021 2022 2023 2024 2025 Terminal Projected EPS 31.2 39.2 49 54.1 53.8 Projected Payout Ratio 96.30% 102.10% 91.80% 97.10% 102.30% Dividend per share 30 40 45 52.5 55 817.2 Dividend Growth Rate -50.00% 33.33% 12.50% 16.67% 4.76% Present Value of projected DPS 27.2 32.8 33.4 35.3 33.4 496.8 Price per share 658.8 (based on 540 mn shares outstanding)

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.

Valuation based on Selected FMCG Comparable Stocks Listed in DSE Annualized EPS Market Price Forward P/E Marico 105.80 2137.8 20.21 GlaxoSmithKline 50.73 3297.9 65.00 Berger Paints 48.04 1616.6 33.65 Olympic Industries Ltd. 10.74 167.6 15.61 Median 26.93 26.93 26.93 BATBC Restated EPS-2020 @540 mn shares 20.16 Value per share based on 540 million shares 542.9

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

Earnings Based Valuation Comparable (Time series analysis): Median (In BDT million*) 2013 2014 2015 2016 2017 2018 2019 (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

Median Valuation Ratios: (2012-19) 2012 2013 2014 2015 2016 2017 2018 2019 Price to gross revenue 0.56 0.88 1.25 1.23 0.90 1.00 0.91 0.65 0.91 Price to net revenue 1.83 3.08 4.47 4.44 3.40 3.93 3.89 3.07 3.65 Price to cash flows 9.40 15.97 33.38 19.45 35.18 20.97 23.59 11.20 20.21 Price- earnings 12.78 19.53 25.31 30.14 19.65 26.07 21.22 18.88 20.44 Price- book value 7.16 10.81 13.87 12.12 7.89 8.83 7.20 4.88 8.36 EV/ EBIT 7.74 10.21 14.41 14.21 11.54 11.83 10.77 9.56 11.10 EV/ EBITDA 6.98 9.42 13.27 13.21 10.53 10.87 9.92 8.91 10.18 * 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. Exp. Values 2020 (BDT mn) C. Per Share D. Price Per Share @540 mn Shares (A x C) Price to gross revenue 0.91 Gross revenue 276,114 511.3 463.0 Price to net revenue 3.65 Net revenue 60,654 112.3 409.6 Price to cash flows 20.21 Cash Flows 12,810 23.7 479.4 Price to earnings 20.44 NPAT 10,886 20.2 412.0 Price to book value 8.36 Book Value 39,461 73.1 610.9 Average Value Per Share @ 540 million shares 475.0

Valuation based on Enterprise Value of the company Based on historical Enterprise Value multiple EV/EBIT EV/ EBITDA Target Multiple 11.10 10.18 Bases (EBIT or EBITDA)- Est. 2020 20,736 23,131 Enterprise Value 230,195 235,435 Plus: Cash & cash equivalent 4,852 4,852 Less: Interest Debt - - Equity Value 235,047 240,289 Value Per Share 435.3 445.0 Average Value per share@540 mn shares 440.1

BATBC appears to be under-valued at current market price based on relative valuation methodologies calculated over 2012 to 2019 audited financial results and historical valuation multiples.

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

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. Key Financial Forecast (2020 to 2025) Revenue: As the pandemic has eased, economic activities of the country has resumed near to full scale, vaccination program has already started, we remained optimistic about BATBC’s performance in 2021.

Sales is expected to remain shaky Overall volume sales is expected to grow from the last year. Besides, there might have throughout the 2020 (except Q1) due some upward price adjustment during the year. Export contribution is also expected to to COVID 19 pandemic while top increase. Meanwhile, entry of Japan tobacco failed to meet the expected growth, three segment will be mostly affected penetrate new products and attain major market position yet and no more appears to be a matter of significant threat to BATBC keeping in mind their last few years of operation in Bangladesh.

(In BDT mn) Year 2017A Year 2018A Year 2019A Year 2020E Year 2021E Year 2022E Year 2023E Year 2024E Year 2025E Volume Sales (Local) 53,204 51,425 50,744 51,110 54,073 51,144 53,718 56,741 59,949 Volume Sales (Export) - - 69 508 1,593 4,771 8,513 10,955 9,031 Volume Sales (Total) 53,204 51,425 50,813 51,618 55,665 55,915 62,231 67,697 68,980 Gross Revenue 204,140 233,118 269,855 276,114 342,752 371,162 421,357 450,251 470,537 VAT,SD, HDSC & CD 152,176 178,478 213,033 215,460 262,236 279,855 312,509 330,319 349,237 Net Revenue 51,964 54,640 56,821 60,654 80,515 91,307 108,848 119,932 121,300 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. We are projecting 60% supplementary duty in low segment from June 2021 against current rate of 57%. Overall revenue contribution from high & low segments might decline while contribution of sales revenue from premium and mid segment will increase and export is expected to increase sizably. Revenue Statement Year 2017 Year 2018 Year 2019 Year 2020E Year 2021E Year 2022E Year 2023E Year 2024E Year 2025 Gross revenue from 201,918 230,674 266,018 273,990 332,988 354,855 396,728 419,261 443,189 domestic sale Supplementary duty 151,973 178,218 212,983 215,460 262,236 279,855 312,509 330,319 349,237 and VAT Revenue from domestic 49,945 52,456 53,036 58,530 70,752 75,000 84,219 88,942 93,952 sale, net Gross revenue from - - 66 508 2,867 9,065 17,025 23,006 18,964 finished goods export Export duty 0 0 0 0 0 0 0 0 0 Revenue from sale 49,945 52,456 53,102 59,038 73,618 84,065 101,244 111,948 112,917 of finished goods, net Gross revenue from 2,222 2,444 3,770 1,616 6,897 7,242 7,604 7,984 8,383 tobacco leaf export Export duty 203 261 51 ------Revenue from leaf 2,019 2,184 3,719 1,616 6,897 7,242 7,604 7,984 8,383 export, net Total revenue from 51,964 54,640 56,821 60,654 80,515 91,307 108,848 119,932 121,300 contracts with customers, net

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

Cost of manufacturing & gross profit: As the company has been able to outperform the Cost of manufacturing per unit is industry and also possess a major control in raw-material sources and price expected to increase marginally over determination, considering last few years of the company’s cost pattern in challenging the years. business environment we are making downward revisions in our projected cost of production per unit. However, we still believe that the rate will increase each year considering inflationary pressure and industry demands. While changes in production cost is linked mostly to volume production rather than increase in total revenue, gross profit margin will continue to witness improvement as like past years.

Operating performance: Analyzing the recent financials and observing the market We expect that BATBC will increase scenario, we can infer that increased promotional campaign from BATBC is happening its budget for marketing and selling of cigarettes in the new competitive looking into Japan Tobacco’s entry in Bangladesh market at large scale. We expect that landscape to retain and grow its BATBC will increase its budget for marketing and selling of cigarettes in the new market share competitive landscape to retain and grow its market share.

However, we think that our prior projection was a bit more conservative. Hence, we made a downward revision of OPEX (excluding depreciation) to sales ratio at 13.5% of net sales revenue from previous projection of 14%. Last 5 years average rate was 13% of sales. Operating Performance Indicators Year 2017A Year 2018A Year 2019A Year 2020E Year 2021E Year 2022E Year 2023E Year 2024E Year 2025E OPEX* to Sales ratio 13.1% 11.9% 13.8% 13.0% 13.5% 13.5% 13.5% 13.5% 13.5% EBITDA Margin 35.5% 39.3% 34.1% 38.1% 42.7% 46.6% 48.3% 48.2% 47.4% EBITDA Growth 27.4% 16.5% -9.9% 19.5% 48.5% 23.8% 23.7% 9.9% -0.5% EBIT Margin (OPM) 32.6% 36.2% 31.5% 34.2% 39.8% 44.1% 46.3% 46.4% 45.6% EBIT Growth 28.2% 16.7% -9.7% 16.0% 54.6% 25.7% 25.1% 10.3% -0.6% *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 mostly. However, to increase share liquidity it also announced stock dividend in 2018 and 2020 respectively. In 2020, BATBC also announced interim dividend (300% for 9 months) as well. BATBC suspended declaring interim dividend from 2016 to 2013 to finance large expansion project. Overall payout also declined during that period. However, the expansion project has already been completed and hence we are expecting almost 90-100% payout in coming years from BATBC. Key Profitability Indicators 2013A 2014A 2015A 2016A 2017A 2018A 2019A 2020A 2021E 2022E 2023E 2024E 2025E Total Cash Dividend 620% 550% 550% 600% 600% 500% 400% 600% 300% 400% 450% 525% 550% Total Stock Dividend 0% 0% 0% 0% 0% 200% 0% 200% 0% 0% 0% 0% 0% Final Cash Dividend 520% 450% 550% 600% 600% 500% 400% 300% 150% 200% 250% 325% 300% Interim Cash dividend 100% 100% 0% 0% 0% 0% 0% 300% 150% 200% 200% 200% 250% DPS (Cash) 62.0 55.0 55.0 60.0 60.0 50.0 40.0 60.0 30.0 40.0 45.0 52.5 55.0 EPS 82.1 104.7 97.9 126.4 130.0 167.0 51.0 60.5 31.2 39.2 49.0 54.1 53.8 Total Payout Ratio 75.5% 52.5% 56.2% 47.5% 46.0% 30.0% 77.9% 132.3% 96.3% 102.1% 91.8% 97.1% 102.3% Dividend Yield (Based on YE price) 3.9% 2.1% 1.9% 2.4% 1.8% 1.4% 4.1% 5.1% -/- -/- -/- -/- -/- Source: BAT Bangladesh Annual Reports and EBLSL Research Estimates

Potential Litigation Risk: The company has BDT 17,806 million retrospective demand by the National Board of Revenue for Value Added Tax and Supplementary Duty on the Company's Pilot and Bristol brands alleging to have evaded tax by selling in the low price segments rather than the mid - tier segments. The Company received the certified copy of the Appellate Division of the Supreme Court's judgement dated 25 July 2018 in favour of the appeal made by the Company. The Government has filed review petition on 25 March 2020 against the judgment passed by the Appellate Division of the Supreme Court of Bangladesh. Any unfavorable verdict may cause large one time cash outlay.

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

2.0 Analysis on the Recent Financial and Operational Performance

Bottom-line converges with our expectation, declaration of 200% stock dividend along with cash dividend will help increase liquidity in market

LATEST PSI: The Board of Directors has recommended 300% final cash dividend (total 600% Cash Dividend of the Financial Year ended on December 31, 2020 inclusive of 300% Interim Cash Dividend, which has already been paid) and 200% stock dividend for the year ended on December 31, 2020. Date of AGM: 28.03.2021, Time: 10:30 AM, Venue: Digital Platform. Record date: 03.03.2021. The Company has also reported EPS of Tk. 60.48, NAV per share of Tk. 188.89 and NOCFPS of Tk. 83.44 for the year ended on December 31, 2020 as against Tk. 51.37, Tk. 198.85 and Tk. 86.61 respectively for the same period of the previous year. (Source: DSE News Board) Increase in Paid-up Capital by disbursing stock dividend will help increase in market liquidity of BATBC shares BATBC is currently one of the least liquid stocks in the market. Daily average turnover of the company in DSE in 2020 was BDT 61.5 million (excluding block market trade) and average turnover per day in 2019 was BDT 52.7 million. BATBC also declared 200% stock Stock liquidity in DSE improved by 10 dividend in 2018 which helped in increasing the liquidity of the stock trading to a great times after bonus issue in 2018. extent. In 2018 and 2017, average turnover per day were only BDT 5.3 million and 11.8 million respectively. With the recent declaration of 200% stock dividend we are expecting significant improvement in the liquidity of the share of the company in both the bourses in the long run, though floor price mechanism remains an obstacle in the short-run. BATBC managed to retain bottom-line growth amidst COVID-19 pandemic riding on improved efficiency and deferral on some major operating expenses components BATB continues to maintain a healthy financial position in 2019 despite a number of challenges: Particulars 2019 2020 YoY Growth EPS (BDT) 51.37 60.64 18.0% NAVPS (BDT) 198.85 188.89 -5.0% NOCFPS (BDT) 86.61 83.44 -3.7% DPS (BDT) 40.00 60.00 50.0% Total Dividend 400% 800% Cash Dividend 400% 600% Bonus Dividend 0% 200%

Particulars 9M2019 9M2020 YoY % of Sales % of Sales Q3,2019 Q3,2020 YoY % of Sales % of Sales (BDT mn) (BDT mn) Growth 9M2019 9M2020 (BDT mn) (BDT mn) Growth Q3,2019 Q3,2020 Quantity Sold 36,629 38,779 5.9% 10,446 10,045 -3.8% Gross Revenue 194,360 203,802 4.9% 60,114 55,634 -7.5% Net Revenue 40,606 43,442 7.0% 100.0% 100.0% 15,186 12,737 -16.1% 100.0% 100.0% Cost of Sales 21,006 14,506 -30.9% 51.7% 33.4% 7,135 5,957 -16.5% 47.0% 46.8% Gross Profit 19,601 22,979 17.2% 48.3% 52.9% 8,051 6,781 -15.8% 53.0% 53.2% Op. Expenses 5,311 4,143 -22.0% 13.1% 9.5% 1,798 1,539 -14.4% 11.8% 12.1% Op. Profit 14,290 18,836 31.8% 35.2% 43.4% 6,253 5,242 -16.2% 41.2% 41.2% PBT 13,206 17,856 35.2% 32.5% 41.1% 5,757 5,001 -13.1% 37.9% 39.3% NPAT 6,471 8,722 34.8% 15.9% 20.1% 2,661 2,718 2.1% 17.5% 21.3% Effective Tax Rate 49.5% 47.0% -2.5% 53.8% 45.6% -8.1% Res. EPS (BDT) 35.9 48.5 34.8% 14.8 15.1 2.1% *Figures are in BDT million unless otherwise stated.

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

Cost control & deferral of some of the major expenses during the pandemic and last year’s excess tax provision helped in achieving positive bottom- line growth BATBC’s net profit in Q3 grew by 2.1% against 16.1% de-growth in net revenue. Reduction in operating expenses, deferral adjustment of some of the cost components in earlier period along with previous year’s higher tax provision, which normalized in current year helped the company to achieve positive growth in net profit during Q3,2020. Based on the nine monthly results, net profit grew by 34.8% YoY against 4.9% YoY growth in gross revenue. Operating expenses declined by 22.0% on YoY while cost of sales declined by Improvement in profit margins in 30.9% on YoY basis. Many of operations were shut in the second quarter due to the 2020 were for the time being and will pandemic, which brought down the operating costs. Deferral of major initiatives & normalize in future expenditures (such as Market research & operational expenditure, Trade support expenditure, Travelling and training, Social responsibility etc.) due to Covid-19 along with lower interest expenses contributed to the overall improvement in net profit margins. Besides, the company has adjusted some operating cost incurred in Q1, 2020 and reclassified them as cost of sales in second and third quarters that also contributed to significant drop in operating expenses during Q2 & Q3.

Lower volume sales affected topline growth of the company due to COVID- 19 pandemic, however, handsome growth is expected in future with higher sales and potential price increase

BATBC Volume Sales BATBC experienced marginal de-growth in volume sales in Q3 as persisting COVID-19 (mn Sticks) pandemic effect along with overstock of cigarettes by retailers on speculation of price

hike affected sales volume. BATBC experienced 3.8% decline in its total volume sales on 16,719 16,719

18,000 YoY basis. On a QoQ basis sales volume was declined by 16.4%. Sales usually spikes in

15,276 15,276

15,155 15,155

15,049 15,049

14,429 14,429 16,000 14,184

13,850 13,850 second quarter of each year ahead of national budget announcement with an anticipation

13,552 13,552 12,631 12,631

14,000 12,015 12,015

11,991 11,991 of the government led price hike. However, in the running year, based on our observation, 10,446 10,446

12,000

10,045 10,045 9,649 9,649 9,230 9,230 we can conclude that even though actual retail sales and consumption of cigarettes were

10,000 declined in the second quarter, total sales by company were not significantly affected due 8,000

6,000 to overstock of cigarettes products by the retailers and distributors prior to budget

4,000 announcement. There were speculations and rumors supported by media reports that 2,000 prices of cigarettes might increase significantly and specific COVID taxes might be

-

Q4 Q3 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q4 Q1 Q2 Q3 Q1 imposed to increase government revenue from the sector with a view to meeting the 2017 2018 2019 2020 national budget deficit at the time of pandemic crisis. Even though actual price increase was insignificant, normalized retail sales in third quarter led to comparatively lower sales on company level, which led to de-growth in volume sales.

Revenue Statement of BATBC (in BDT million) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020(9M) Gross revenue from domestic sale 63,279 72,416 87,411 107,492 124,003 141,639 163,998 201,918 230,674 266,018 202,525 Supplementary duty and VAT 44,837 51,803 62,420 78,144 90,885 103,614 121,715 151,973 178,218 212,983 160,360 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 42,165 Gross revenue from finished goods export ------66 269 Export duty 0 0 0 0 0 0 0 0 0 0 0 Revenue from export of finished goods, net 0 0 0 0 0 0 0 0 0 66 269 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 1,009 Export duty 204 286 282 212 279 203 165 203 261 51 0 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 1,009 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 43,442

Half-yearly double digit topline growth came down to 4.9% only on YoY basis up to September 2020 as lower volume sales in Q3 caused the gross revenue of the company to decline by 7.5% in third quarter on a YoY basis. Probable large decline in high end segment like Benson & Hedges brand in the pandemic period might have largely affected sale revenue during the quarter.

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

As the economic activities of the country is recovering, consumption of cigarettes have also normalized but yet to achieve its optimum level. As the COVID situation has nearly normalized and vaccination process is likely to begin soon, we expect growth to be driven by both higher volume sales as well as potential government led price hike after upcoming national budget announcement. Changes in Tobacco Tariffs & SD Cigarette Price (10 Sticks) Supplementary Duty Segment Previous Now Change Previous Now Change (bp) Low BDT 37 BDT 39 +5.4% 55% 57% +2% Medium BDT 63 BDT 63 +0.0% 65% 65% 0% High BDT 93 BDT 97 +4.3% 65% 65% 0% Premium BDT 123 BDT 128 +4.1% 65% 65% 0% Bidi Price Supplementary Duty Segment Previous Now Change Previous Now Change Non-filter bidi (25 Sticks) BDT 14 BDT 18 28.6% 30% 30% 0% Non-filter bidi (12 Sticks) BDT 6.72 BDT 09 33.9% 30% 30% 0% Non-filter bidi (8 Sticks) BDT 4.48 BDT 06 33.9% 30% 30% 0% Filter bidi (20 Sticks) BDT 17 BDT 19 11.8% 40% 40% 0% Filter bidi (10 Sticks) BDT 8.5 BDT 10 11.6% 40% 40% 0% *Effective from 11th June 2020 Export of factory made Cigarettes witnessed big boost during the pandemic period Higher contribution from sales of unmanufactured tobacco as well as higher finished cigarette sales have helped to marginally offset the topline de-growth during the quarter. To encourage export sales, the government has withdrawn export duty on tobacco export in June 2019. Performance of the leaf export improved marginally on YoY basis. Meanwhile, BATBC kicked-off its export of factory made cigarettes in 2019. The company BATBC kicked-off its export of factory recorded cigarette export of 307.8 million sticks worth BDT 267.7 million in up to made cigarettes in 2019 September 2020. Even though finished goods export contributes less than 1% of the total sales, export of factory made cigarettes bear huge potential for bringing robust business growth in future. The management of the company also acknowledges that BATBC 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. Supplementary Duty Rates Decline in supplementary duty on low segment was lower than expected 57% 65% The government has increased supplementary duty in low segment that contributes more LOW TOP-3 than 65% of the total volume sales, effect on net revenue was pretty higher than the gross revenue growth and hence net revenue declined by 16.1% on YoY basis against 7.5% YoY Segment Segments de-growth in gross revenue.

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.

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

Long term review of the key financial indicators Particulars Q1, 2017 Q2, 2017 Q3, 2017 Q4, 2017 Q1, 2018 Q2, 2018 Q3,2018 Q4,2018 Q1, 2019 Q2, 2019 Q3, 2019 Q4,2019 Q1,2020 Q2,2020 Q3,2020 (BDT mn) Volume Sale 14,429 15,276 9,649 13,850 15,049 15,155 9,230 11,991 12,631 13,552 10,446 14,184 16,719 12,015 10,045 (mn Sticks) 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 86,319 61,849 55,634 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 18,099 12,606 12,737 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 9,233 5,273 5,957 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 8,865 7,333 6,781 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 6,619 6,976 5,242 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 6,284 6,571 5,001 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 3,037 2,967 2,718 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 16.87 16.48 15.10 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 65,539 64,447 65,762 Fixed Asset* 15,853 16,848 19,328 20,915 22,361 23,846 25,294 26,483 26,872 28,830 30,296 31,204 30,859 30,969 30,810 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 22,083 28,141 23,833 Cash 3,634 1,016 1,267 978 1,035 655 1,138 1,634 2,172 1,768 3,412 5,394 6,311 1,129 8,495 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 38,830 34,597 37,315 Debt 0 5,800 6,435 3,058 1,500 12,312 5,780 5,180 0 16,616 674 0 0 2,543 0 *includes Asset under Construction; Note: Values in BDT million unless otherwise stated.

Steady business growth driven by the increased volume sales & progressive Volume of Local Cigarette Sold (mn Sticks) pricing policy of the government 60,000

50,000 BATBC has recorded lucrative 16.9% CAGR in gross revenue over the year 2010 to 2019

40,000 driven by increased number of volume sales and progressive pricing and taxation policy

30,000 by the government of Bangladesh. During the preceding 9 years, CAGR of volume sales of

20,000 the company was 7.7%. Volume sales has been experiencing a declining trend since 2018

10,000 due to increased market competition and mixed price impact however, a reversal trend

29,911 34,738 39,011 42,541 48,340 53,204 51,425 50,813 38,471

- was observed since June 2019 after significant price escalation in top three segments.

Even though volume sales in Q2 & Q3 of 2020 was affected by the COVID-19 pandemic, it

2012 2013 2014 2015 2016 2017 2018 2019 should be normalized in coming quarters. The government of Bangladesh has been fixing 2020_9M 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%.

Growth Rates 2012 2013 2014 2015 2016 2017 2018 2019 2020Ann. Volume Sales 12.9% 16.1% 12.3% 9.0% 13.6% 10.1% -3.3% -1.2% 1.8% Gross Revenue 19.7% 21.5% 15.6% 13.4% 15.3% 23.2% 14.2% 15.8% 0.7% Net Sales 18.1% 13.7% 13.9% 12.2% 9.7% 18.8% 5.1% 4.0% 1.9% Net Domestic Cigarette Sales 21.2% 17.4% 12.8% 14.8% 11.2% 18.1% 5.0% 1.1% 7.2% Leaf Export revenue -6.6% -24.3% 30.2% -23.4% -21.4% 37.3% 8.1% 70.3% 6.4% EPS 54.5% 24.9% 27.6% -6.5% 29.1% 3.3% 27.9% -69.2% 25.8% Dividend Per Share 19.0% 24.0% -11.3% 0.0% 9.1% 0.0% -16.7% -20.0% n/a* Gross Profit 17.4% 19.1% 14.9% 18.5% 6.3% 24.8% 11.1% -2.5% 14.1% Operating Profit 31.8% 37.5% 21.4% 14.4% 5.5% 27.8% 16.9% -9.9% 33.8% EBIT 32.2% 37.5% 20.3% 14.0% 4.9% 28.2% 16.7% -9.7% 33.9% Net Income 54.5% 24.9% 27.6% -6.5% 29.1% 3.3% 27.9% -7.6% 25.8% Total Asset 14.3% 22.8% 46.6% 9.3% 19.5% 31.3% 21.8% 5.1% 10.7% *BATBC declared 300% interim dividend in its latest corporate declaration, which is 62% of its net earnings up to 9 months of the FY2020. Solid bottom-line performance despite operating in a controlled regulatory environment Over the 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. However, improvement in gross profit and operating profit margin in latest 9 monthly results of 2020 were mainly driven by deferral of some major expenses

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

during COVID-19 general holidays. Such improvement is temporary and likely to be normalized later on. DUPONT ANALYSIS 2012 2013 2014 2015 2016 2017 2018 2019 2020 An Net Profit AT/Sales 14.3% 15.8% 17.7% 14.7% 17.3% 15.1% 18.3% 16.3% 20.1% Sales/Total Assets 194.9% 186.4% 156.2% 140.8% 134.8% 127.1% 106.1% 98.0% 92.5% ROA 28.0% 29.4% 27.6% 20.7% 23.4% 19.2% 19.4% 15.9% 18.6% Net Profit AT/Total Assets 28.0% 29.4% 27.6% 20.7% 23.4% 19.2% 19.4% 15.9% 18.6% Total Assets/Stockholders Equity 2.2 2.1 2.2 2.2 1.9 1.9 2.0 1.8 1.7 ROE 60.9% 61.8% 61.7% 45.1% 45.3% 37.3% 38.0% 28.3% 31.8%

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

60.5%

59.0% 21.0% 19.6%

58.5% 19.0% 16.8%

17.0% 56.5% 15.0% 54.2% 13.7% 14.2% 15.0% 13.5% 13.6%13.4% 54.5% 53.3% 52.7% 11.9% 12.3% 51.7% 13.0% 52.5% 50.8% 50.7% 51.1% 50.4% 11.0% 9.5% 49.9%

50.5% 49.4%

9.0%

48.5% 7.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020A 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020A

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

14.0%

67.2% 13.9% 13.9%

13.9% 68.0% 66.3% 65.5% 13.8% 64.8% 13.8% 66.0% 13.8%

63.9% 13.8%

64.0%

13.7%

62.0% 59.2% 13.6%

60.0% 13.6%

58.0%

13.5%

56.0%

54.0% 13.4% 2020 2021 2022 2023 2024 2025 2020 2021 2022 2023 2024 2025

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

Finally, the total impact of controlled production cost and operational efficiency has resulted into improved performance in operating profit margin. However, decline in operating profit margin in 2016 and 2019 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 2015-2016 (July- June) & 2019-2020 (July- June). BATBC plans to continue to optimize its cost efficiency program without hampering on targeted production and sales level. Gross Profit Margin Operating Profit Margin

52.9% 54.0% 43.4% 50.4% 45.0% 52.0%

50.0% 47.7% 38.1% 46.8% 47.3% 40.0% 48.0% 45.4% 34.3% 44.3% 33.1% 33.0% 46.0% 44.0% 32.4% 35.0% 31.8% 42.2% 30.4% 44.0% 42.0%

42.0% 30.0% 25.2% 40.0% 22.5% 38.0% 35.7% 25.0% 20.6%

36.0%

20.0% 34.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020A 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020A

Operating Profitability Ratios 2012 2013 2014 2015 2016 2017 2018 2019 2020A. Gross Profit Margin (GPM) 42.0% 44.0% 44.3% 46.8% 45.4% 47.7% 50.4% 47.3% 52.9% Operating Profit Margin (OPM) 25.2% 30.4% 32.4% 33.1% 31.8% 34.3% 38.1% 33.0% 43.4% Pre Tax Profit Margin 23.7% 29.2% 30.6% 31.2% 30.1% 32.3% 35.3% 30.6% 41.1% Net Profit Margin (NPM) 14.3% 15.8% 17.7% 14.7% 17.3% 15.1% 18.3% 16.3% 20.1% Return on Total Assets (ROA) 28.0% 29.4% 27.6% 20.7% 23.4% 19.2% 19.4% 15.9% 18.6% Return on Equity (ROE) 60.9% 61.8% 61.7% 45.1% 45.3% 37.3% 38.0% 28.3% 31.8% Earnings Per Share (Re-stated) 21.9 27.4 34.9 32.6 42.1 43.5 55.6 51.4 64.6

Maintained sound business health with low dependency on debt based financing to meet working capital and capex needs for business expansion

Short-term borrowing coupled with slight increase in liabilities caused marginal decline in current ratios in half yearly results whereas low level of receivables and no additional borrowing contributed to the improvement in current ratios in 2019. Adoption of IFRS 16 has some implication to the financial reporting.

2020 Particulars 2012 2013 2014 2015 2016 2017 2018 2019 (as on Sep.)

Liquidity Ratios: Current Ratio 1.3 1.2 1.1 1.3 1.5 1.3 1.3 1.7 1.6 Quick Ratio 0.5 0.3 0.2 0.3 0.2 0.2 0.3 0.5 0.4 Operating Efficiency Ratios Inventory Turnover Ratio 3.1 3.0 2.5 2.4 2.1 1.7 1.5 1.7 1.4 Receivable Turnover Ratio 28.7 36.5 28.0 29.5 43.7 30.8 16.8 16.8 43.2 Average Collection Period (Days) 12.5 9.9 12.8 12.2 8.2 11.7 21.4 21.5 8.3 Inventory Conversion Period(Days) 116.6 119.1 143.0 149.8 169.8 208.3 245.1 216.0 266.3 Operating Cycle (Days) 129.1 129.0 155.8 162.0 178.0 220.0 266.5 237.5 274.7 A/C Payable Turnover Ratio 4.8 5.0 3.6 2.8 3.0 3.0 2.6 2.6 2.0 Payables Payment Period (Days) 75.8 71.5 98.7 127.2 121.0 121.3 137.0 136.7 180.5 Cash Conversion Cycle (Days) 53.3 57.5 57.1 34.8 57.0 98.6 129.5 100.8 94.2 Total Asset Turnover 1.9 1.9 1.6 1.4 1.3 1.3 1.1 1.0 0.9 Fixed Asset Turnover 5.3 5.9 5.4 4.2 3.6 3.8 3.6 3.0 2.3 Leverage Ratios Total Debt to Equity 0.0% 0.0% 27.5% 0.0% 9.5% 13.2% 17.5% 0.0% 0.0% Debt to Total Assets 0.0% 0.0% 11.6% 0.0% 5.1% 6.6% 9.2% 0.0% 0.0% Coverage Ratios Times Interest Earned (TIE) 36.3 103.5 58.8 88.4 261.8 88.4 41.8 37.9 180.1

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

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 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. On operating performance scales, inventory turnover ratios have exhibited a declining trend over the long term but remained somehow stable in last three years (2017-19), the ratio has declined slightly in September 2020 due to pandemic impact on the company’s business. 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. Receivable turnover ratio increased Operating efficiency has declined but significantly while average collection period declined sharply due to significant decline in well above the acceptable standard trade receivables at the end of September 2020. Intercompany transactions accounts for 2-3% of total account receivables. Account payable turnover ratio were almost stable while payable payment period increased recently. Both the total asset turnover ratio and fixed asset turnover declined over the years as net revenue didn’t increase in line with increase in total asset as well as increase in fixed assets. However, fixed asset turnover declined in September 2020. 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. 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, details of the Demand from overseas countries expansion project has not been disclosed by the company. However, as local demand has may flourish as Bangladesh remains slowed down, capacity enhancement may lead to increase in depreciation expenses that in one of the lowest tariff regime will result in narrow profit margins in the short term. BATBC 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.

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

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

Leading tobacco products British American Tobacco has been serving the market in this region since 1910. BAT manufacturing company in Bangladesh is a part of British American Tobacco plc, one of the leading global tobacco Bangladesh groups that manufactures and markets different brands of tobacco products in more than 200 markets 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 BAT Bangladesh is a part of British 1910. After the partition of in 1947, Pakistan Tobacco Company was established in American Tobacco plc, one of the 1949. The company setup its first factory in Bangladesh (the then East Pakistan) in 1949 leading global tobacco group 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.

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, 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 2020* 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% 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% 12.12% 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% 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% 5.93% Shadharan Bima Corporation 2.82% 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% 0.34% Sena Kallyan Sangstha 0.26% 0.26% 0.26% 0.26% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Oher Local Corporate Investors 0.00% 0.00% 0.00% 0.00% 0.00% 0.91% 1.02% 0.85% 0.52% 0.98% 2.02% Other 11.97% 11.86% 10.92% 12.84% 14.95% 0.79% 0.81% 0.71% 0.70% 2.47% 3.22% Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% * As on September 2020; Source: BAT Bangladesh annual reports, DSE Website & EBLSL Research

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

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 2018. 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 0.34% 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 11% shares of the company are held by foreign investors while only 3.3% shares are held by general public.

Sponsor/Director Govt. Institute Foreign Public As on Jan 31, 2021 72.91% 0.64% 12.04% 11.14% 3.29% 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

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 Overall the quality of financial achieve its own strategic vision. In conjunction with BAT’s global experiences, its reporting appears to be transparent management team can choose the right strategic direction in right time in such a highly & fair enough though disclosures of regulated and competitive local market. The company’s strategic leadership has been material facts seems reasonable but not adequate 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

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

 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.  Investor’s 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 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.

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

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. 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. The estimated size of the country’s overall cigarette market was about Tk. 350 bn in 2019. The overall legal cigarette industry volume was declined by 5% in 2019 compared to the previous year. Two factors mainly caused the volume de-growth in tobacco industry; the The estimated size of the country’s industry experienced an upsurge in illegal brands in different forms; i.e. DNP (Duty Not overall cigarette market was about Paid), Counterfeit & Transit illegal cigarettes. In 2019, the decline was mostly contributed Tk. 350 bn in 2019 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 in 2019. 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. Cigarette industry experienced a better year in 2020 despite the pandemic halted overall economic activities throughout the country. Presence of duty evaded and illicit cigarettes declined due to limited international flights and reduction in cross border transport due to COVID-19 pandemic. Meanwhile, commencement of export sales also paved a new way to generate additional revenue beyond meeting local demand for cigarettes.

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

Strong growth in Cigarette consumption driving the global tobacco industry growth The size of the global legal tobacco market is estimated at some USD 932.1 billion (2020), and is expected to expand at a compound annual growth rate (CAGR) of 1.8% from 2021 to 2028. 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. Meanwhile, according to recent research report, the COVID-19 pandemic has had a substantial negative impact on the global tobacco industry owing to the nature of the disease. COVID-19 is a viral infectious disease that attacks the lungs and severely impacts breathing. WHO has recognized people with significant tobacco consumption or any tobacco addiction as most vulnerable people.1

Cigarettes dominate among various forms of tobacco consumption The consumption of tobacco products takes place in several forms, which includes: Industry Volume Sales Cigarettes, Bidis, Chewing tobacco (Loose leaf , Pellets, Plug, Twist), Cigars’ Blunts’ Breakdown Cigarillos, Dokha, Roll-Your-Own cigars, Kreteks, Creamy snuff, Dipping tobacco, Extra- Top 3 Low long cut, Dissolvable tobacco, Tobacco gum etc. Gul, jarda, sadapata and khainy are 100%

90% known as smokeless tobacco that largely consumed by the low income group of people.

33% 26% 21% 25% 47% 40% 80% Smokeless tobacco includes products that are chewed, sucked, dipped, held in the mouth,

70% or inhaled. Bidis are more popular among the poor in Bangladesh. However, the size of 60% the traditional tobacco industry is shrinking but the market share of cigarettes is 50% increasing as consumer are moving from bidi to cigarette. Bidi that occupied almost 30%

40%

% of Total Total of % of the tobacco market size now occupies only around 10% of total tobacco industry, with 30%

20% approximately 75% of total volume sales in Bangladesh. This change is driven by the

10% strong economic development of the country. This change in consumer behavior has also

67% 74% 79% 75% 53% 60%

0% 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

2015 2016 2017 2018 2019 2014 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. The market competition increased 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 campaigns, brand penetration & large recruitment with attractive remuneration and benefit packages from JTI, posing serious business threat to other players, including BATBC.

1 https://www.grandviewresearch.com/industry-analysis/tobacco-market

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

Market Segmentation of Top Tobacco Brands Premium High Medium Low BATBC Benson & Hedges John Player Gold Leaf, Pall Star, Starlight, Royals, Bristol, Pilot and Hollywood Mall and Capstan Star-next Japan Tobacco n/a n/a Navy LD, Real, Sheikh and K2 International 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 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 to launch a number of global brands in premium and high segment in Bangladesh market.

Demand for Cigarette was not 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 Region2, 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 (ITC) Bangladesh Wave 1 (2009) and Wave 2 (2010) Surveys3 found that the total price elasticity of demand for cigarettes was estimated at −0.49. The elasticity of 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 Bangladesh4 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.

2 http://www.who.int/tobacco/global_report/2011/en_tfi_global_report_2011_appendix_VI_table_2.pdf 3 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 4 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

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

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- Illegal trading, down-trading or switching to illegal-smuggled cigarettes are common Cigarettes constitute 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 ̴ 11%+ increasingly shifted to illicit duty evaded cigarettes. Illegal cigarette trade has surged of the market exponentially over the past few years. That indicates that price control mechanism has (in 2019) 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 taxes5. 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.

5 https://bit.ly/31WGRUc https://www.bhorerkagoj.com/print-edition/2019/04/23/247031.php

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

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: 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 data6, 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 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. The present tobacco tax structure in Bangladesh is very complex compared to other industries. 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 Tobacco products generate more supplementary duty varies significantly across tobacco products and brands. While listed than 20% of the yearly tax revenue of companies in other sectors enjoy a differential corporate tax rate, the same privilege was the government. withdrawn by the government for BATBC, the only listed cigarette companies in Bangladesh. Cigarette manufacturers now belong to 45% corporate income tax rate. Additionally, 2.5% surcharge has been imposed on the profit before tax in the sector. 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.

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

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

Price Slab (10 Sticks) of Cigarette Fixed by NBR 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 Premium 66.00+ 80.00+ 90.00+ 70.00+* Not fixed Not fixed 105.00+ 123.00+ 128.00+ High 35.20-39.50 42.00-45.00 50.00-54.00 40.00-69.00 70.00+ Not fixed 75.00+ 93.00+ 97.00+ Medium 24.75-25.25 28.00-30.00 32.00-35.00 20.00-39.00 45.00+ Not fixed 48.00+ 63.00+ 63.00+ 27.00(Local) Low 12.10-12.30 14.00-14.20 15.00-16.50 19.00 23.00 35.00 37.00+ 39.00+ 35.00(MNC) *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 2020-21 Non-filtered bidi 25 Sticks 4.36 5.80 6.14 7.06 10.61 12.50 12.50 14.00 18.00 Filtered bidi 20 Sticks 4.93 6.30 6.94 7.98 12.03 12.00 15.00 17.00 19.00 Source: NBR SROs (Statutory Regulatory Orders), National Budget Speech & EBLSL Research

Supplementary Duty (SD) Rates on Cigarettes & Bidi Imposed by NBR 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 Premium 61% 61% 61% 63% 65% 65% 65% 65% 65% High 59% 59% 61% 61% 65% 65% 65% 65% 65% Medium 56% 56% 60% 60% 63% 63% 65% 65% 65% 52%(Local) Low 39% 39% 43% 48% 50% 55% 55% 57% 55%(MNC) Non-filtered bidi 20% 30% 25% 25% 30% 30% 30% 35% 35% Filtered bidi 25% 30% 30% 30% 35% 35% 35% 40% 40% Source: NBR SROs (Statutory Regulatory Orders), National Budget Speech & EBLSL Research

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 0.0% 0.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Surcharge (HDSC)* Custom/ Export Duty* 10.0% 10.0% 10.0% 10.0% 10.0% 25.0% 10.0% 0.0% 35.0% (Listed) 40.0% (Listed) 40.0% (Listed) Corporate Tax Rate 45.0% 45.0% 45.0% 45.0% 45.0% 42.5% (Non-listed) 45.0% (Non-listed) 45.0% (Non-listed) 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

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

PROFIT & LOSS STATEMENT

Year 2017 Year 2018 Year 2019 Year 2020E Year 2021E Year 2022E Particulars (million) Quantity Sold - Total 53,204 51,425 50,813 51,618 55,665 55,915 Gross Turnover 204,140 233,118 269,855 276,114 342,752 371,162 Less: Value Added Tax, HDSC and SD 152,176 178,478 213,033 215,460 262,236 279,855 Net Turnover 51,964 54,640 56,821 60,654 80,515 91,307 Cost of Goods Sold 27,181 27,096 29,973 30,583 35,557 36,231 GROSS PROFIT 24,783 27,543 26,849 30,071 44,959 55,076 Operating Expenses: 6,981 6,724 8,082 8,244 11,213 12,661 Selling and Distribution Expenses 6,981 6,724 8,082 8,244 11,213 12,661 Administrative Expenses - - - PROFIT FROM OPERATIONS 17,802 20,820 18,767 21,827 33,746 42,414 Financial Expenses 192 474 471 - - - Interest Income 7 - Other Non-Operating Income 50 - 24 - - - Other Non-Operating Expenses 25 15 - - - PROFIT BEFORE WPPF 17,642 20,331 18,320 21,827 33,746 42,414 Allocation for WPPF 882 1,017 916 1,091 1,687 2,121 PROFIT BEFORE TAX 16,760 19,314 17,404 20,736 32,059 40,294 Provision for Income Tax 8,121 8,985 7,029 9,849 15,228 19,140 Provision for Deferred Income Tax 808 317 1,129 - - - PROFIT AFTER TAX FOR THE YEAR 7,830 10,012 9,246 10,886 16,831 21,154 Other comprehensive income/(loss) - - Total Comprehensive Income for the Year 7,830 10,012 9,246 10,886 16,831 21,154

Actual EPS (BDT) 130.5 166.9 51.4 60.5 31.2 39.2 Restated EPS (BDT) @180 mn shares 43.5 55.6 51.4 60.48 93.5 118.0

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

STATEMENT OF FINANCIAL POSITION ASSETS: Year 2017 Year 2018 Year 2019 Year 2020E Year 2021E Year 2022E Non-Current Assets: 20,915 26,484 31,204 31,094 31,237 31,434 Property, Plant and Equipment-Carrying Value 14,265 15,841 21,786 28,594 28,112 27,996 Asset Under Construction 6,650 10,643 7,746 1,000 1,625 1,937 Right of use of Assets 1,672 1,500 1,500 1,500 Current Assets: 25,499 30,060 28,226 34,199 45,311 53,125 Inventories 17,469 19,429 16,538 23,374 28,290 30,028 Trade Debtors 2,315 4,174 2,610 2,729 3,623 4,109 Advances, Deposits and Prepayments 4,737 4,823 3,684 4,852 6,441 7,305 Cash and Cash Equivalents 978 1,634 5,394 3,243 6,957 11,684 TOTAL ASSETS 46,415 56,543 59,430 65,293 76,548 84,559

SHAREHOLDERS' EQUITY AND LIABILITIES: Shareholders' Equity: 23,112 29,529 35,793 39,461 45,492 50,446 Share Capital 600 600 1,800 1,800 5,400 5,400 Capital Reserve 65 65 65 65 65 65 Retained Earnings/ Revenue Reserve 22,448 28,864 33,929 37,597 40,027 44,982 Non-Current Liabilities: 3,705 4,092 6,622 6,702 7,040 7,223 Net defined benefit plans 869 979 952 1,031 1,369 1,552 Lease liability 0 0 1,412 1,412 1,412 1,412 Deferred Tax Liability 2,836 3,113 4,259 4,259 4,259 4,259 Current Liabilities: 19,597 22,923 17,014 19,130 24,017 26,890 Bank Overdraft 3,058 800 0 0 0 0 Short Term Bank Loans 0 4,380 0 0 0 0 Trade Creditors 10,102 10,518 12,237 12,792 15,228 15,879 Current Tax Liabilities 5,365 5,919 4,023 4,855 7,029 9,159 Provision for accruals 1,073 1,306 364 1,092 1,369 1,461 Obligation under finance lease 0 0 391 391 391 391 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 46,415 56,543 59,430 65,293 76,548 84,559

Net Asset Value (NAV) per share 385.21 492.15 198.9 219.2 84.2 93.42

No. of Share Outstanding 60 60 180 180 540 540

Discount rate determination for DCF Valuation

Covariance 0.01% Raw Beta 0.6158 Variance of market return 0.01% Blume Adjusted Beta 0.74 Risk Free Rate 4.25% Beta 0.62 Daily Stock Return 0.10% Market Return 7.61% Daily Avg. Market return- DSEX 0.02% Liquidity & Regulatory Risk Premium 5.00% Daily Avg. Market return- DS30 0.02% Equity Risk Premium 8.4% Avg. Yearly Stock Return 42.38% Cost of equity (CAPM) 10.5%

Yearly DSEX return 7.61% After Tax Cost of Debt 0.00% Yearly DS30 return 9.01% Weight of Equity 100.00% Weight of Debt 0.00% Raw Beta (Regression) 0.62 Adjusted Beta 0.74 WACC 10.5%

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

Formulas Used 1. 퐸푃푆 = 푁푒푡 푃푟표푓𝑖푡 퐴푓푡푒푟 푇푎푥 ÷ 푁표. 표푓 푆ℎ푎푟푒푠 푂푢푡푠푡푎푛푑𝑖푛푔 2. 퐸퐵퐼푇 = 푁푒푡 푃푟표푓𝑖푡 + 퐼푛푡푒푟푒푠푡 퐸푥푝푒푛푠푒푠 + 푇푎푥 3. 퐸퐵퐼푇퐷퐴 = 퐸퐵퐼푇 + 퐷푒푝푟𝑖푐𝑖푎푡𝑖표푛 퐸푥푝푒푛푠푒푠 4. 퐶푢푟푟푒푛푡 푟푎푡𝑖표 = 퐶푢푟푟푒푛푡 퐴푠푠푒푡푠 ÷ 퐶푢푟푟푒푛푡 퐿𝑖푎푏𝑖푙𝑖푡𝑖푒푠 5. 푄푢𝑖푐푘 푅푎푡𝑖표 = [퐶푢푟푟푒푛푡 퐴푠푠푒푡푠 – 퐼푛푣푒푛푡표푟푦 – 푃푟푒푝푎𝑖푑 푒푥푝푒푛푠푒푠] / 퐶푢푟푟푒푛푡 퐿𝑖푎푏𝑖푙𝑖푡𝑖푒푠 6. 푅푂퐴 = 푁푒푡 푃푟표푓𝑖푡 ÷ 퐴푣푒푟푎푔푒 푇표푡푎푙 퐴푠푠푒푡푠 7. 푅푂퐸 = 푁푒푡 푃푟표푓𝑖푡 ÷ 퐴푣푒푟푎푔푒 푇표푡푎푙 퐸푞푢𝑖푡푦 8. 퐼푛푣푒푛푡표푟푦 푇푢푟푛표푣푒푟 푅푎푡𝑖표 = 퐶표푠푡 표푓 퐺표표푑푠 푆표푙푑 ÷ 퐴푣푒푟푎푔푒 퐼푛푣푒푛푡표푟푦 9. 푅푒푐푒𝑖푣푎푏푙푒 푇푢푟푛표푣푒푟 푅푎푡𝑖표 = 푁푒푡 푅푒푣푒푛푢푒 ÷ 퐴푣푒푟푎푔푒 퐴푐푐표푢푛푡 푅푒푐푒𝑖푣푎푏푙푒푠 10. 퐴푣푒푟푎푔푒 퐶표푙푙푒푐푡𝑖표푛 푃푒푟𝑖표푑 (퐷푎푦푠) = 365 ÷ 푅푒푐푒𝑖푣푎푏푙푒 푇푢푟푛표푣푒푟 푅푎푡𝑖표 11. 퐼푛푣푒푛푡표푟푦 퐶표푛푣푒푟푠𝑖표푛 푃푒푟𝑖표푑(퐷푎푦푠) = 365 ÷ 퐼푛푣푒푛푡표푟푦 푇푢푟푛표푣푒푟 푅푎푡𝑖표 12. 푂푝푒푟푎푡𝑖푛푔 퐶푦푐푙푒 = 퐴푣푒푟푎푔푒 퐶표푙푙푒푐푡𝑖표푛 푃푒푟𝑖표푑 + 퐼푛푣푒푛푡표푟푦 퐶표푛푣푒푟푠𝑖표푛 푃푒푟𝑖표푑 13. 퐴푐푐표푢푛푡 푃푎푦푎푏푙푒 푇푢푟푛표푣푒푟 푅푎푡𝑖표 = 퐶표푠푡 표푓 퐺표표푑푠 푆표푙푑 ÷ 퐴푣푒푟푎푔푒 퐴푐푐표푢푛푡 푃푎푦푎푏푙푒푠 14. 푃푎푦푎푏푙푒푠 푃푎푦푚푒푛푡 푃푒푟𝑖표푑 (퐷푎푦푠) = 365 ÷ 퐴푐푐표푢푛푡 푃푎푦푎푏푙푒 푇푢푟푛표푣푒푟 푅푎푡𝑖표 15. 퐶푎푠ℎ 퐶표푛푣푒푟푠𝑖표푛 퐶푦푐푙푒 (퐷푎푦푠) = 푂푝푒푟푎푡𝑖푛푔 퐶푦푐푙푒 − 푃푎푦푎푏푙푒 푃푎푦푚푒푛푡 푃푒푟𝑖표푑 16. 푇표푡푎푙 퐴푠푠푒푡 푇푢푟푛표푣푒푟 = 푁푒푡 푅푒푣푒푛푢푒 ÷ 퐴푣푒푟푎푔푒 푇표푡푎푙 퐴푠푠푒푡 17. 퐹𝑖푥푒푑 퐴푠푠푒푡 푇푢푟푛표푣푒푟 = 푁푒푡 푅푒푣푒푛푢푒 ÷ 퐴푣푒푟푎푔푒 퐹𝑖푥푒푑 퐴푠푠푒푡 18. 푇𝑖푚푒푠 퐼푛푡푒푟푒푠푡 퐸푎푟푛푒푑 = 퐸퐵퐼푇 ÷ 퐼푛푡푒푟푒푠푡 퐸푥푝푒푛푠푒푠 19. 푃퐸퐺 푟푎푡𝑖표 = 푃/퐸 푅푎푡𝑖표 / 퐸푎푟푛𝑖푛푔푠 퐺푟표푤푡ℎ 푅푎푡푒 20. 푁퐴푉푃푆 = 푆ℎ푎푟푒ℎ표푙푑푒푟′푠 퐸푞푢𝑖푡푦 ÷ 푁표. 표푓 푆ℎ푎푟푒푠 푂푢푡푠푡푎푛푑𝑖푛푔

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

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IMPORTANT DISCLOSURES

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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]

EBLSL Research Team M. Shahryar Faiz SAVP & 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] 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

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Our Locations

Head Office:

Jiban Bima Bhaban, HO Extension: 10 Dilkusha C/A, 1st Floor, Bangladesh Sipping Corporation Dhaka-1000 (BSC) Tower +8802 9553247, 9556845 2-3, Rajuk Avenue (4th floor), +8802 47111935 Motijheel, Dhaka-1000 FAX: +8802 47112944 +880257160801-4 [email protected]

Dhanmondi Branch: Chattogram Branch:

Sima Blossom, House # 390 (Old), 3 (New), Suraiya Mansion (6th Floor); Road # 27 (Old), 16 (New),Dhanmondi R/A, 30, Agrabad C/A Dhaka-1209. Chattogram-4100 +031 2522041-43 +8802-9130268, +8802-9130294