EFTA01385505.pdf

> Consumer Deutsche Bank 0 BAT — Gerry Gallagher, BUY, close 4914p, 6000p tgt, 22% upside ■ BAT offers 50% TSR over the next two years, only 15ppts of which is from We see potential for 50% TSR over the next two years an EV re-rating. Operational drivers: 27.8% Re-rating 14 8% ■ Its broad offering in next generation products (NGP), both in heat-not- EV/EBITDA remains at 12.3x burn and vaping, puts BAT at a competitive advantage could fuel group organic growth of c5% organic growth FY18 and c6% FY19. 12 0% 7.4% it BAT is one of the fastest growing large cap European staples yet it 1.3% trades at a discount to the European sector and its international peers. 0% 10% 20% 30% 40% 50% ■ Key drivers: • EBITDA (operational) growth • Debt paydown Assoc. and rams. • PIE expansion ex operational drivers - Strong organic EBITDA growth and debt pay down (c28ppts). • Incremental EPS at higher PIE multiple DPS EBITDA growth could fuel 10% pa EPS growth, while debt pay-down Source: Deutsche Bank eslimales: assumes 10% EPS growth further shifts the EV to equity. - Attractive dividend (c7ppts upside over next two years). Operational drivers are key— we see substantial EBITDA growth to come - Re-rating to 13.1x 18E EV/EBITDA (c15ppts upside) and still at a discount to staples and international peers. Concerns regarding 16 EBITDA (GBPbn) (LHS) Growth (RHS) 40% potential plans by the FDA to reduce cigarettes' nicotine content 14 1 35% (announced in July 2017) have brought the multiple down to 12.4x. 12 1 30% - The FDA regulatory process takes many years. By its conclusion, NGPs 10 1 25% may already be well-established. 8 20% 6 15% ■ Catalysts: US tax reform (could add 5-8% to EPS); FY17 results end Feb; 41 10% FDA comments through 2018 2j 5% Related DB Research: 0% What's going on (Gallagher) FY17 FY18 FY19 FY20 You can't have your cake and eat it (Gallauherl Source: Deulsche Bank estimates: assumes 10% EPS growth Deutsche Bank Research' European Equity Focus -Jarkary 2015 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0086791 CONFIDENTIAL SDNY_GM_00232975 EFTA01385505