14 July 2014 Asia Pacific/Philippines Equity Research Conglomerates LT Group, Inc. (LTG.PS / LTG PM) Rating OUTPERFORM* [V] Price (11 Jul 14, P) 15.22 INITIATION Target price (P) 20.20¹ Upside/downside (%) 32.7 Tobacco turnaround Mkt cap (P mn) 164,702 (US$ 3,791) Enterprise value (P mn) 179,870 ■ Initiate with OUTPERFORM. We initiate coverage on LT Group with an Number of shares (mn) 10,821.39 Free float (%) 25.6 OUTPERFORM rating and a P20.2 target price, implying 33% potential 52-week price range 24.9 - 13.3 upside. The company's tobacco business is the key driver of our target price ADTO - 6M (US$ mn) 3.2 and 2015 net income forecast, at 57% and 50%, respectively. *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ■ Tobacco business should lead the group's profit recovery. We estimate ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). that the tobacco business (PMFTC) will contribute P5.8 bn, up 609% YoY, to the company's consolidated net income in 2015. Consequently, this should Research Analysts result in a consolidated net income of P11.5 bn in 2015E, up 86% YoY. Alvin Arogo There would be another round of predetermined excise tax increase in 63 2 858 7716 [email protected] 2015E, but it should be lower than what has been implemented in 2014E Danielo Picache and 2013A. We believe that this will provide room for the company to 63 2 858 7758 potentially implement a pricing strategy that will allow it to improve PMFTC's [email protected] gross profit and EBIT margin, which we forecast will expand to 25.4% and 12.8%, respectively. ■ Stable profit contribution from banks and beverages. Next to the tobacco business, the other major sources of the company's consolidated 2015E net income are its banking (PNB) and beverages (ABI) businesses, which we estimate will contribute 37% and 11%, respectively. As a base case forecast for 2015-17, we expect 5% p.a. growth in the profit contribution of banks, and 14% p.a. for beverages. ■ Tobacco and banks should drive NAV. Based on our estimates, 57% of the company's NAV is from its tobacco business, and 23% from banking. Key investment risks for LT Group are a higher-than-expected decrease in tobacco sales volume due to price increases, and the failure of its recent bank merger to bring in synergies and efficiencies. Share price performance Financial and valuation metrics Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Revenue (P mn) 55,791.9 64,902.1 68,590.3 72,009.5 40 600 EBITDA (P mn) 9,337.2 11,858.5 12,828.4 13,803.6 30 400 EBIT (P mn) 5,312.0 7,259.0 7,933.6 8,612.7 20 Net profit (P mn) 8,669.2 6,208.7 11,534.2 12,148.1 10 200 EPS (CS adj.) (P) 0.85 0.57 1.07 1.12 0 0 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Change from previous EPS (%) n.a. Consensus EPS (P) n.a. 0.83 0.82 1.065 The price relative chart measures performance against the EPS growth (%) -41.1 -32.4 85.8 5.3 PHILIPPINE SE COMPOSITE INDEX which closed at 6937.21 P/E (x) 17.9 26.5 14.3 13.6 on 10/07/14 On 10/07/14 the spot exchange rate was P43.39/US$1 Dividend yield (%) 1.0 0.7 0.8 2.1 EV/EBITDA (x) 19.6 15.2 13.4 11.7 Performance over 1M 3M 12M P/B (x) 1.4 1.4 1.3 1.2 Absolute (%) 5.5 -12.3 -38.9 — ROE (%) 10.0 5.5 9.6 9.4 Relative (%) 4.2 -16.9 -43.8 — Net debt/equity (%) 12.1 9.6 4.4 net cash Source: Company data, Thomson Reuters, Credit Suisse estimates DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 14 July 2014 Focus charts and tables Figure 1: Tobacco should lead the group's turnaround… Figure 2: …as we expect price increases in 2015 100 Sales volume (sticks bn) 60 14 LT Group net income (P bn) 90 Blended ASP (P/pack) Blended excise tax (P/pack) 48 50 12 Tobacco 80 45 Others 42 70 10 Banking 6.2 34 40 6.9 6.0 5.8 60 8 30 50 26 26 28 30 3.9 24 6 0.8 1.6 1.8 40 2.1 1.5 17 1.3 20 4 1.3 30 16 14 4.7 2 3.8 4.1 4.3 4.5 20 3.4 6 6 10 10 0 12/12A 12/13A 12/14E 12/15E 12/16E 12/17E 0 - 12/11A 12/12A 12/13A 12/14E 12/15E 12/16E 12/17E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 3: Our SOTP-based target price of P20.2 implies 33% potential upside Gross Attributable % share 15E NI % share Subsidiary % stake NAV (P mn) NAV (P mn) of NAV (P mn) 15E NI Methodology Tobacco 49.6% 277,275 137,528 57% 5,767 50% 25x target P/E Banking 56.5% 100,748 56,893 23% 4,305 37% Current market price Beverage 99.9% 30,602 30,571 13% 1,224 11% 25x target P/E Distilled Spirits 100.0% 9,557 9,557 4% 138 1% 1Q14 actual book value Property Development 99.3% 7,987 7,931 3% 100 1% 1Q14 actual book value LTG NAV, gross 242,480 100% 11,534 100% less: Parent net debt (cash) 0 1Q14 actual book value LTG NAV, before discount 242,480 less: % target discount 10% Holding company discount LTG NAV 218,232 Shares (mn) 10,821 LTG target price (P) 20.20 Source: Credit Suisse estimates Figure 4: Domestic and regional comparables for LTG's consumer businesses—valuation summary Company Reuters CS Mkt cap P/E (x) P/B (x) ROE (%) EPS growth (%) name ticker rating (US$ mn) 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E Philippines Universal Robina URC.PS O 8,003 32.1 27.3 6.4 5.9 20.5 22.5 8 18 Jollibee Foods JFC.PS O 4,402 35.3 28.6 8.3 7.5 24.8 27.6 18 24 Emperador EMP.PS N 4,012 24.7 22.2 4.9 4.2 21.1 20.3 17 11 Average 5,472 30.7 26.0 6.5 5.9 22.1 23.4 14 17 Tobacco BAT Malaysia BATO.KL O 5,963 21.3 20.7 32.7 30.8 163.8 152.9 8 3 Gudang Garam GGRM.JK N 8,719 20.2 17.4 3.1 2.8 16.2 16.9 15 17 ITC Ltd ITC.BO O 45,839 31.3 26.7 10.5 9.6 36.2 37.6 18 18 KT&G Corp 033780.KS U 12,508 15.3 14.8 2.3 2.1 14.0 13.7 33 4 Average 18,257 22.0 19.9 12.1 11.3 57.5 55.3 19 10 Beverage Emperador EMP.PS N 4,012 24.7 22.2 4.9 4.2 21.1 20.3 17 11 Thai Beverage TBEV.SI O 12,650 19.6 18.0 3.9 3.4 20.8 20.2 8 9 United Spirits UNSP.BO N 5,551 96.6 55.6 4.1 3.8 5.3 7.1 (387) 74 Average 7,404 47.0 31.9 4.3 3.8 15.7 15.9 (121) 31 Source: RAVE, Credit Suisse estimates LT Group, Inc. (LTG.PS / LTG PM) 2 14 July 2014 Tobacco turnaround We initiate coverage on LT Group with an OUTPERFORM rating and a P20.2 target price, We initiate coverage on LT implying 33% potential upside. The company's tobacco business is the key driver of our Group with an target price and 2015 net income forecast, at 57% and 50%, respectively (Figures 5 and 6). OUTPERFORM rating Tobacco business to lead the group's profit recovery We estimate that the tobacco business (PMFTC) will contribute P5.8 bn to the company's We believe that the lower consolidated net income in 2015E—609% higher than our P0.8 bn estimate for 2014 and excise tax increase in 47% higher than P3.9 bn in 2013. Consequently, this will result in a consolidated net 2015E will provide room for income of P11.5 bn in 2015E—86% higher than our P6.1 bn estimate for 2014 and 33% gross profit margin higher than P8.7 bn in 2013A. expansion For 2015, we expect a substantial recovery in the profit contribution of the company's tobacco business, as we forecast PMFTC's net income will increase 609% YoY.