MARGIN OF SAFETY: 42%

November 9, 2014

Independent Equity Research

Disclaimer: I, Michael Elias, do not own any positions in UVV, nor do intend to initiate a position in UVV before January 1,

2015.

Hold: Universal Corporation

(Ticker: UVV)

Michael Elias: SEAS ‘15

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Hold: Universal Corporation (Ticker: UVV)

Michael Elias: SEAS ‘15

Company Overview

Nature of Operations

UVV is the leading global leaf tobacco supplier, operating in 30 countries on five continents. The

largest portion of their business involves procuring and processing flue-cured and burley leaf tobacco for

manufacturers of consumer tobacco products. Their primary business is procuring, financing, processing, packing,

storing, and shipping leaf tobacco for sale to manufacturers of consumer tobacco products throughout the world.

NOTE: UVV does not manufacture cigarettes or other consumer tobacco products. Through various operating

subsidiaries and unconsolidated affiliates located in tobacco-growing countries around the world, they contract,

purchase, process, and sell flue-cured and burley tobaccos, as well as dark air-cured and oriental tobaccos. Flue-cured,

burley, and oriental tobaccos are used principally in the manufacture of cigarettes, and dark air-cured tobaccos are

used mainly in the manufacture of cigars, pipe tobacco, and smokeless tobacco products. Recently, they formed a joint

venture to supply liquid nicotine to the e-cigarette industry, representing potential for growth in an expanding

marketplace.

Revenue Streams from Operations

UVV generates their revenues from product sales, processing fees, and fees for other services. Sales to their

five largest customers, with whom they have longstanding relationships, have accounted for more than 60% of their

consolidated revenues for each of the past three fiscal years. Their sales consist primarily of flue-cured and burley

tobaccos. For the fiscal year ended March 31, 2014, their flue-cured and burley operations accounted for 90% of their

revenues and 89% of their segment operating income.

Scope of Operations

They conduct their business in varying degrees in a number of countries, including Argentina, Bangladesh,

Brazil, the Dominican Republic, Germany, Guatemala, Hungary, India, Indonesia, Italy, Malawi, Mexico,

Mozambique, the Netherlands, Nicaragua, Paraguay, the People’s Republic of China, the Philippines, Poland, Russia,

Singapore, South Africa, Spain, Switzerland, Tanzania, the United States, Zambia, and Zimbabwe. In addition,

Socotab, L.L.C. has oriental tobacco operations in Bulgaria, Greece, Macedonia, and Turkey.

Market Posit ion

They are a major purchaser and processor in the chief exporting regions for flue-cured and burley tobacco

throughout the world. They estimate that they have historically handled, through leaf sales and processing, between

35% and 45% of the annual production of such tobaccos in Africa and between 15% and 25% in Brazil. These

percentages can change from year to year based on the size, price, and quality of the crops. Recently, as tobacco

growing regions have expanded in Africa, they have handled a larger proportion of the crops there. They also handled

between 25% and 35% of the flue-cured and burley tobacco produced in North America in fiscal year 2014. The

majority of this tobacco was sourced in the United States, where they sell processed U.S. tobacco to cigarette

manufacturers and process U.S. flue-cured and burley tobacco on a fee basis. They participate in the procurement,

processing, storage, and sale of oriental tobacco through ownership of a 49% equity interest in Socotab, L.L.C., a

leading processor and supplier of oriental tobaccos. In addition, they maintain a presence, and in certain cases, a

leading presence, in virtually all other major tobacco growing regions in the world. They also have a leading position

in worldwide dark tobacco markets. Their dark tobacco operations are located in most of the major producing countries

and in other smaller markets. Dark tobaccos are typically used in the manufacture of cigars, pipe tobacco, and

smokeless tobacco products, and as components of certain “roll-your-own” cigarette products.

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Industry Overview

Supply Chain for Tobacco

Since unprocessed, or “green,” tobacco is a perishable product, processing of leaf tobacco is an essential

component of the supply chain. Their processing of leaf tobacco includes grading in the factories, blending, removal

of non-tobacco material, separation of leaf from the stems, drying, packing to precise moisture targets for proper aging,

as well as temporary storage. Accomplishing these tasks generally requires investments in factories and machinery in

areas where the tobacco is grown. Processed tobacco that has been properly packed can be stored by customers for a

number of years prior to use, but most processed tobacco is used within two to three years. Once processed, the tobacco

is then sold to cigarette manufacturers who package the tobacco into various products for end users. In this framework,

UVV serves as the link between the rural growers of tobacco worldwide, and the cigarette manufacturers who sell

cigarettes to consumers

Demand

Over the last three decades, the percentage of the global population which smokes has fallen, but the number

of smokers has increased significantly due to global population growth. Industry data also shows that over the past ten

years, total world consumption of cigarettes grew at the compound annual rate of 0.6%, including annual growth of

about 3.4% in China. Outside China, consumption fell by 1.1% during the ten-year period. UVV expects that ongoing

global demand for leaf tobacco will remain relatively stable primarily due to increased consumption in emerging

markets (Asia, the Middle East, and Africa), influenced by demographic trends such as population growth and

increasing disposable income. They believe these increases will continue to offset declining cigarette consumption in

developed markets.

Their sales consist primarily of flue-cured and burley tobaccos. Those types of tobacco, along with oriental

tobaccos, are used in American-blend cigarettes which are primarily smoked in Western Europe and the United States.

English-blend cigarettes which use flue-cured tobacco are smoked in Asia and other emerging markets. Industry data

shows that consumption of American-blend cigarettes has declined at a compound annual rate of 2.4% for the ten

years ended in 2013. As cigarette consumption declines in developed markets and increases in the emerging markets,

there may be less demand for burley and oriental tobaccos and more demand for flue-cured tobacco. However, demand

is affected by many factors, including regulation, product taxation, illicit trade, alternative tobacco products, and

Chinese imports. On a year-to-year basis, UVV is also susceptible to fluctuations in leaf supply due to crop sizes and

leaf demand as manufacturers adjust inventories or respond to changes in cigarette markets. Recent declines in some

of their customers’ sales volumes in the U.S. and Western European markets could affect the demand for certain styles

of leaf available for sale in fiscal year 2015. At the same time, their uncommitted inventories have increased, and they

are anticipating an oversupply of tobacco at this time. They also sell dark tobacco which is used in cigars and other

smokeless products. They expect demand for this category of tobacco to remain stable.

Supply

Crops sold in fiscal year 2014 were larger than in the prior fiscal year in many of their key sourcing areas for

flue-cured and burley tobacco. Burley production, in particular, was up approximately 22% in fiscal year 2014. The

larger crops followed smaller crops and strong sales of uncommitted tobacco inventories in fiscal year 2013. They

entered fiscal year 2014 with very low uncommitted inventories available for sale and fewer shipments of prior year

crop carrying into their first and second fiscal quarters. Crop sizes for flue-cured, burley and oriental tobaccos available

for export are expected to increase again in fiscal year 2015. Given this strong production, UVV expect an oversupply

of tobacco in fiscal year 2015.

Production

Worldwide flue-cured tobacco production outside of China increased by about 2% in fiscal year 2014 to 2.0

billion kilos. China is an extremely large market that is predominately domestic. Because very little of that tobacco is

available outside of that country to trade, UVV generally excludes Chinese crops when they consider worldwide

production. Burley crops increased sharply, by about 22%, in fiscal year 2014. The increases in both flue-cured and

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burley crop tobacco production replenished industry uncommitted tobacco inventories which were at extremely low

levels following smaller crops in fiscal year 2013. They estimate that at March 31, 2014, industry uncommitted flue-

cured and burley inventories totaled about 47.3 million kilos, an increase of about 65% from March 31, 2013 levels.

They believe flue-cured production (excluding China) will increase by about 6%, to about 2.1 billion kilos,

in fiscal year 2015. Burley production is forecast to increase by about 12%, with a large part of this increase coming

from expanded tobacco production in Africa. UVV also believes that certain varieties of oriental tobacco have moved

to an oversupply position. They forecast that dark air-cured production will remain flat in fiscal year 2015.

Looking forward, UVV believes that global tobacco production will continue to increase slightly to meet

continued slow but steady growth in total demand. South America, Asia, Africa, and North America will remain key

sourcing regions for flue-cured and burley tobaccos. Over the last decade, Africa has experienced growth in flue-cured

and burley tobacco production of over 200 million kilos. They expect Africa to continue to be an important tobacco

source and to lead tobacco production growth outside of China.

Pricing

Factors that affect green tobacco prices include global supply and demand, market conditions, production

costs, foreign exchange rates, and competition from other crops. UVV works with farmers to maintain tobacco

production and to secure product at price levels that are attractive to both the farmers and their customers. In some

areas, tobacco competes with agricultural commodity products for farmer production. If prices for soybeans, wheat,

rice, and seed oils rise in certain origins, green tobacco prices may have to rise to maintain tobacco production levels.

This could be a factor in efforts of the WHO (World Health Organization) to shift farmer production away from leaf

tobacco to other crops. In the past, leaf shortages in specific markets or on a worldwide basis have also led to green

tobacco price increases.

Competit ion

The leaf tobacco industry is highly competitive. Competition among leaf tobacco merchants is based on the

ability to meet customer specifications in the growing, buying, processing, and financing of tobacco, and on the price

charged for products and services. Competition varies depending on the market or country involved. The number of

competitors varies from country to country, but there is competition in most areas to buy and sell the available tobacco.

UVV’s principal competitor is Alliance One International, Inc. (“Alliance One”). Alliance One operates in most of

the countries where they operate. Based on their estimates, UVV does not believe that worldwide market shares differ

substantially between the two companies. Most of their major customers are partially vertically integrated, and thus

also compete with us for the purchase of leaf tobacco in several of the major markets.

In most major markets, smaller competitors are very active. These competitors typically have lower overhead

cost requirements and provide less support to customers and farmers. Due to their lower cost structures, they can often

offer a price on products that is lower than UVV’s price. However, UVV believes that they provide quality controls

and farm programs that add value for their customers in an increasingly regulated world and make their products

highly desirable. For example, they have established worldwide farm programs designed to prevent non-tobacco

related materials from being introduced into the green tobacco delivered to their factories. In addition, they have

established programs for good agricultural practices and have been active in social responsibility endeavors such as

the elimination of child labor in many of the developing countries in which they do business. They believe that their

major customers value these services and that their programs increase the quality of the products and services they

offer. They also believe that their customers value the security of the supply that UVV is able to provide due to strong

relationships with their farmer base.

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Investment Thesis

Precipitous Price Drop without Justification or Explanation

Over the week of September 15th, 2014, the share price of UVV dropped from $51.26 to $45.05. A check of the

news wire shows that no announcement, downgrades, or changes in the fundamental occurred over this period,

making the movement

questionable at best, if not

suspicious. This price

movement prompted UVV to

release the following statement

on September 18th: "We note

the recent activity in the

Company's common stock

during this week. Subsequent to

the release of our quarterly

earnings last month, we have

not issued any release, and we

are not aware of any other such

release that would have resulted in this week's unusual activity in our common stock." This price drop, no matter

how improbable or unexplainable, creates a potential value opportunity. Subsequent price movement has left the

stock trading at around $42 per share.

UVV Currently Trades At 31% Discount to Adjusted Book Value

With this unexplained price movement, the

stock is now trading at a considerable

discount to its book value, tangible book

value, and adjusted book value (as defined

by the reproduction value of its assets less

liabilities). This price movement has

created a margin of safety on the assets of

the firm by roughly 31%. This means that

all subsequent earnings, dividends and

growth of the company are achieved for

free.

Declining Earning Power

While UVV is now trading at a discount to

its asset value, it has been suffering from a

decline in Net Income. While there is a

degree of seasonality in the tobacco

industry, a comparison of Net Income

Applicable to Common Shareholders from

Q3 2014 to Q3 2013 shows a 37% decline

in Net Income. This can be viewed in two

ways, one, there is reduced business from

small clients. As was asserted in the

“Supply” portion of this analysis, the

tobacco industry is faced with an

oversupply of tobacco with respect to a

-5,000

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15,000

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35,000

40,000

NI

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Date

Net Income Applicable To Common Shares

Net IncomeApplicableTo CommonShares

Linear (NetIncomeApplicableTo CommonShares)

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relatively stagnant demand. This will put downward pressure on the both top and bottom line of UVV as well as its

competitors. The management of UVV believes that this oversupply will persist into the next Fiscal Year, translating

into the continued impairment of their Net Income, at least until Q2 of 2015. More evidence is needed in order to

know whether this oversupply will be temporary or permanent.

Consistent Dividends

Despite the decline in Net Income, UVV has increased their dividend from $.51 to $.52, largely due to their healthy

financial position. This can be seen as management acknowledging that the opportunity for growth is limited, and

that the best use of the cash is in the form of dividends to satisfy shareholders.

Three Year Holding Period: Intr insic Value of $59.54

The basis of this investment lies in the undervaluation of UVV’s assets. With an approximate adjusted book value of

$55.09 and expected dividends over the next three years of $.52 per share per quarter, the three year target price of

UVV is $59.54. This figure is determined by the sum of the present value of its assets and the present value of

expected future dividends (discounted at 8%, industry cost of capital is 7.07%). This figure represents the dollar

value of our investment in three years, by collecting dividends as we wait for the share price to reflect the intrinsic

value of UVV’s assets.

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Asset Reproduction Value

To determine an appropriate value of the Shareholder Equity of the Universal Corporation, we must analyze the

reproduction cost of the assets listed on their balance sheet. Working our way down the balance sheet, we find the

cost pursuant to a newcomer into the market if they were to replicate UVV’s fiscal position.

Cash and Cash Equivalents

A new entrant would be forced to pay 100% for the cash account of the business.

Accounts Receivable

All firms have an expectation of the percentage of accounts receivable they expect to be “unpaid”. In the case of a

company operating in the commodities business, this percentage is relatively low, constituting about 5% of the

outstanding accounts receivable. To remain conservative in our valuation, we assume that roughly 10% of the

outstanding accounts receivable will go unpaid. This gives us a reproduction cost of 90% for the firms’ accounts

receivable.

Accounts Receivables from Unconsolidated Affi l iates

Similar to the case above, a percentage of the Accounts payable of UVV is expected to be uncollectable. In the case

of UVV’s accounts receivable from unconsolidated affiliates, we should factor in a higher percentage of

uncollectable obligations for these companies enjoy some kind of mutually beneficial relationship that can

potentially make them more likely to not pay their obligations, in return for some other trade agreement or increased

equity position in the affiliate. As this area of the accounts receivables is marked by a greater degree of uncertainty

regarding payments, we should take this into consideration in our analysis. As such, we will assign a reproduction

value to this asset of roughly 80%.

Advances to Suppliers

There are many ways in which an advance can be perceived. Generally, it is best to pay for items with assets on

hand rather than ask for an advance on goods, unless the counterparty is strapped for cash. With this in mind, we

view advances on goods to suppliers, as a riskier asset, for their ability to payback such advances is in greater

question. As such, we must discount these assets accordingly. Being conservative in this assumption, we discount

this asset by 20%, leaving us a reproduction cost of 80%

Inventory

Inventory on the balance sheet is broken up into two segments, Tobacco and Other. The tobacco segment of

inventory represents the goods that are the cornerstone of UVV’s business, and a sizeable amount of its total assets.

Since tobacco is a perishable good, we should assume that a percentage of the tobacco on UVV’s balance sheet will

go bad before being sold. This since they move through inventory pretty fast, we can conservatively estimate the

reproduction value of its tobacco inventory at 80%. The “Other” component of its inventory constitutes liquids used

in e-cigarettes among other things. Since it is unclear, what the breakdown of this item is, a more conservative

reproduction cost of 70%

Prepaid and Deferred Taxes

When it comes to taxes, you pay what you are told to pay. In this case, we reproduce these tax assets at 100% of

their book value as 100%.

Plant, Property, and Equipment (PPE)

Determining the reproduction cost of PPE is undoubtedly the most challenging part of any asset valuation attempt.

Breaking this account down into its individual components, Plant, Property and Equipment, is the best method to

tackling this obstacle.

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Plant

When analyzing the plants (buildings) that UVV owns, we see that their real estate holdings are diversified

throughout the world with concentrations in tobacco growing regions. Since the property values depend on a

considerable number of factors, it is difficult to create a clear picture of what these assets would be worth today.

However, we do know that the people who would likely buy these products are competitors who would be willing to

pay at least close to the book value of these assets in order to acquire them. Taking this into heavy consideration, we

can estimate the reproduction value of their buildings at approximately 70%.

Property

This account constitutes the physical land that UVV owns. Most of this land was purchased in the late 1990’s and

early 200’s. Land prices have risen considerably since their purchase due to the increasing demand for land. Taking

this capital gain, and offsetting it with potential losses due to the value of foreign currencies in which this located,

we will assume that the land can be carried at 100% of its book value, excluding depreciation.

Equipment

When analyzing the value of equipment, it is important to know how specialized the equipment is. In the case of a

company whose equipment is used for processing tobacco, it is safe to assume that this equipment it specialized and

will not fetch close to its book value if purchased or sold. Moreover, since UVV would only liquidate this machinery

if its business were no longer viable, it would be sold at fire sale prices. As such, we should assume that at best, they

would be able to recover 50% of the book value of its equipment.

Goodwill

Alas, the part of the balance sheet which often muddles of fact and fiction, as well as past mistakes. While often

overlooked or ommited from most analysis, we must determine appropriate value of the “hidden assets” represented

by the goodwil. In the case of UVV, it is unclear what tangible assets are represented by this goodwill account.

However, this is not enough of a reason to completely write off the value of UVV’s goodwill. As a conservative

measure, and in-line with industry practice, it is safe to assume that roughly 15% of the company’s goodwill

translates into physical assets which can be sold.

Investments in Unconsolidated Affi l iates

This portion of the balance sheet constitutes a 49% equity interest in Socotab, L.L.C., a leading processor and

supplier of oriental tobaccos. Since the nature of investments and investment performance is always uncertain, it is

necessary to be conservative when analyzing the company’s potential return on an equity investment. To be most

conservative, we carry this equity position at 70% of its book value, assuming a 30% loss in this position.

Other Assets

We assume that a new entrant must replicate the entirety of UVV’s other assets which include their distribution

channels which are largely responsible for their business succeeding as a going concern, translating into a

reproduction cost of 100%.

Liabi l it ies

We are assuming the new entrant must pay the full reproduction cost of the UVV’s liabilities which constitute the

accounts payable, accrued wages, the debt utilized in their capital structure (D/E ≈ .5), as well as it’s notes payable

to suppliers. This represents a reproduction cost of 100% for the firms’ liabilities.

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Summary

Consolidated Balance Sheets (USD $)

In Thousands, unless otherwise

specifiedReproduction Cost Reproduction Value

ASSETS

Cash and cash equivalents 100% $29,567 $29,567 $163,532 $74,631

Accounts receivable, net 90% $261,146 $290,162 $468,015 $365,777

Advances to suppliers, net 80% $56,237 $70,296 $134,621 $62,013

Accounts receivable - unconsolidated

affiliates

80% $78,966

$98,707 $7,375 $70,175

Inventories - at lower of cost or market:

Tobacco 85% $989,649 $1,164,293 $639,812 $1,037,320

Other 70% $70,361 $100,516 $67,219 $80,651

Prepaid income taxes 100% $28,138 $28,138 $27,866 $28,004

Deferred income taxes 100% $34,560 $34,560 $22,052 $30,751

Other current assets 100% $83,754 $83,754 $142,755 $130,721

Total Current Assets 86% $1,632,377 $1,899,993 $1,673,247 $1,880,043

Property, plant and equipment

Land 100% $17,022 $17,022 $17,275 $17,231

Buildings 70% $167,698 $239,568 $239,913 $237,923

Machinery and equipment 50% $288,532 $577,064 $562,597 $563,615

Total property, plant and equipment 0% $0 $833,654 $819,785 $818,769

Less: accumulated depreciation 0% $0 -$528,722 -$523,239 -$530,038

Property, plant and equipment, net 0% $0 $304,932 $296,546 $288,731

Other assets

Goodwill and other intangibles 15% $14,894 $99,291 $99,453 $99,648

Investments in unconsolidated

affiliates

70% $62,189

$88,841 $95,305 $99,362

Deferred income taxes 100% $18,861 $18,861 $14,562 $28,026

Other noncurrent assets 100% $68,973 $68,973 $91,794 $87,748

Total other assets 40% $110,386 $275,966 $301,114 $314,784

Total Assets 96% $2,380,932 $2,480,891 $2,270,907 $2,483,558

LIABILITIES AND SHAREHOLDERS' EQUITY

Notes payable and overdrafts 100% $359,349 $359,349 $62,905 $194,266

Accounts payable and accrued expenses 100% $154,826

$154,826 $212,422 $222,226

Accounts payable - unconsolidated

affiliates

100% $1,150

$1,150 $65 $8

Customer advances and deposits 100% $57,723 $57,723 $15,869 $92,871

Accrued compensation 100% $20,272 $20,272 $31,772 $22,152

Income taxes payable 100% $11,164 $11,164 $15,694 $14,694

Current portion of long-term obligations 100% $118,750

$118,750 $116,250 $213,750

Total Current Liabilities 100% $723,234 $723,234 $454,977 $759,967

Long-term obligations 100% $230,000 $230,000 $240,000 $173,750

Pensions and other postretirement

benefits

100% $74,975

$74,975 $85,081 $95,098

Other long-term liabilities 100% $34,567 $34,567 $34,457 $35,911

Deferred income taxes 100% $39,235 $39,235 $45,500 $59,373

Total Liabilities 100% $1,102,011 $1,102,011 $860,015 $1,124,099

Shareholders' equity

Common stock $207,552 $206,446 $202,844

Retained earnings $971,391 $993,093 $959,242

Accumulated other comprehensive loss

-$44,001 -$34,332 -$42,505

Total Universal Corporation

shareholders' equity $1,347,965 $1,378,230 $1,332,604

Noncontrolling interests in subsidiaries $30,915 $32,662 $26,855

Total shareholders' equity 93% $1,278,921 $1,378,880 $1,410,892 $1,359,459

Sep. 30, 2014 Mar. 31, 2014 Sep. 30, 2013

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Earnings Power Value

Oversupply Will Drive Lower Tobacco Prices in FY2015

As the production of both flue-cured and burley leaf tobacco remains constant, there will be an oversupply of both

flue-cured and burley leaf tobacco in the market. This juxtaposed with a stagnant demand forecast will lead to

reduced tobacco prices across the board. This drop in tobacco prices is evident in the sharply reduced top and

bottom lines of UVV. In Q2 of 2014, Net Income Applicable to Common Shareholders was negative, roughly -$3M.

Since this oversupply is expected to persist for another year, great caution must be taken when both considering an

investment in UVV as well as valuing the future earnings and dividends.

Expected Future Dividends

UVV has historically paid a consistently increasing dividend to its common shareholders, which has made it an

attractive investment to Dividend investors. However, with its earning power in question due to it oversupply, the

dollar value of the dividend must be called into question. If the tobacco supply decreases, and prices return to their

historical average, the top and bottom lines of UVV will increase, leaving them in a comfortable position to pay

dividends on par or greater than their historical average, directly from their net income. However, if oversupply

persists and management chooses to keep their dividend policy, UVV will begin to pay dividends out of their

retainer earnings. This will constitute an erosion of asset value which is detrimental to long term investors. For our

earning power valuation, we will assume that the means by which investors access the earnings of the firm and will

be through the dividends which will remain constant at $.52 per share per quarter over the next three years. This

assumption is based on UVV’s increase in its dividend with the knowledge that an oversupply exists. This denotes

the firm’s ability to support its current dividend policy given the short term outlook of the industry.

Present Value of Expected Future Dividends

We are considering an investment in UVV with a holding

period of 3 years. We are assuming that over this three year

period, our investment will be supported by the asset value

of the firm, protecting our initial investment in the case of

liquidation. As a going concern, we can expect to receive

dividends from the continued operations of UVV. These

dividends are projected to remain constant at $.52 per share

per quarter. Over the three year potential holding period, we

can expect to receive a total dividend of $7.80 per share.

The average cost of capital for the tobacco industry is

7.07%. As a conservative measure, we assume that the cost

of capital of UVV is approximately 8%, slightly higher than

the industry average. Discounting these dividends at the

estimated cost of capital, we determine that the present

value of expected future dividends from the operations of

UVV is $4.45 per share. Assuming this dividend is paid out

as a percentage of net income, and not from the firms

retained earnings, we arrive at our three year intrinsic value

target of $59.54 per share.

Period Quarter Dividend PV of Dividend

1 Q4 2014 $0.52 $0.48

2 Q1 2015 $0.52 $0.45

3 Q2 2015 $0.52 $0.41

4 Q3 2015 $0.52 $0.38

5 Q4 2015 $0.52 $0.35

6 Q4 2015 $0.52 $0.33

7 Q1 2016 $0.52 $0.30

8 Q2 2016 $0.52 $0.28

9 Q3 2016 $0.52 $0.26

10 Q4 2016 $0.52 $0.24

11 Q4 2016 $0.52 $0.22

12 Q1 2017 $0.52 $0.21

13 Q2 2017 $0.52 $0.19

14 Q3 2017 $0.52 $0.18

15 Q4 2017 $0.52 $0.16

Total $7.80 $4.45

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Inherent Risks

As with any investment, there are risks inherent to the cash flows associated with a business’s operations. Contained

below, is a segmented view of the major risks associated with UVV’s business as a going concern.

Operational Risks

Tobacco Quality and Quantity Risk

When UVV contracts directly with tobacco farmers or tobacco farmer cooperatives, which is the method they

use to purchase tobacco in most countries, they bear the risk that the tobacco delivered may not meet customer quality

and quantity requirements. If the tobacco does not meet such market requirements, they are not be able to fill all of

their customers’ orders, and such failure would have an adverse effect on profitability and results of operations.

Because in a contract market their obligation is to purchase the entire tobacco plant, which encompasses many leaf

styles, they also have a risk that not all of that production will be readily marketable at prices which support acceptable

margins. In addition, in many foreign countries where they purchase tobacco directly from farmers, they provide them

with financing. Unless they receive marketable tobacco that meets the quality and quantity specifications of their

customers, they bear the risk that they will not be able to fully recover their crop advances or recover them in a

reasonable period of time.

Dependency Risk

UVV is one of two major independent global competitors in the highly competitive leaf tobacco industry,

both of whom are reliant upon a few large customers. The loss of one of those large customers or a significant decrease

in the demand for UVV’s products or services could significantly decrease their sales of products or services, which

would have a material adverse effect on their results of operations. The competition among leaf tobacco suppliers and

dealers is based on the ability to meet customer requirements in the buying, processing, and financing of tobacco, and

on the price charged for products and services. Because they rely upon a few significant customers, the consolidation

or failure of any of these large customers, or a significant increase in their vertical integration, could contribute to a

significant decrease in their sales of products and services.

They compete for both the purchase and sale of leaf with smaller leaf tobacco suppliers in some of the markets

where they conduct business. Some of these smaller leaf tobacco suppliers operate in more than one country. Since

they typically provide little or no support to farmers, these leaf tobacco merchants typically have lower overhead

requirements than UVV does. Due to their lower cost structures, they often can offer prices on products and services

that are lower than their prices. Their customers also directly source leaf tobacco from farmers to meet some of their

raw material needs. Direct sourcing provides their customers with some qualities and quantities of tobacco that they

prefer not to use in their existing blends and that may be offered for sale. This competition for both the sale and

purchase of leaf could reduce the volume of the leaf UVV handles and could negatively impact their financial results.

Supply and Demand Risk

As a leaf tobacco supplier, UVV’s financial results can be significantly affected by changes in the overall

balance of worldwide supply and demand for leaf tobacco. The demand for tobacco, which is based upon customers’

expectations of their future requirements, can change from time to time depending upon factors affecting the demand

for their products. Their customers’ expectations and their demand for leaf tobacco are influenced by a number of

factors, including:

Trends in global cigarette consumption

Trends in consumption of cigars and other tobacco products such as e-cigarettes

Levels of Competition among tobacco brands

The world supply of leaf tobacco at any given time is a function of current tobacco production, inventories

held by manufacturers, and the uncommitted stocks of leaf tobacco held by leaf tobacco suppliers. Production of

tobacco in a given year may be significantly affected by such factors as:

Demographic shifts that change the number of farmers or the amount of land available to grow

tobacco

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Decisions by farmers to grow crops other than tobacco

Elimination of government subsidies to farmers

Volume of annual tobacco plantings and yields realized by farmers

Availability of crop inputs

Weather and Natural Disaster, including any adverse weather conditions that may result from

climate change

Crop infestation and disease

Any significant change in these factors could cause a material imbalance in the supply of and demand for

tobacco, which would affect their results of operations.

Environmental Risk

The financial results of UVV, particularly their year-over-year quarterly comparisons, may be significantly

affected by variations in tobacco growing seasons and fluctuations in crop sizes. The timing of the cultivation and

delivery of tobacco is dependent upon a number of factors, including weather and other natural events, and their

processing schedules and results of operations can be significantly altered by these factors. In addition, the potential

impact of climate change is uncertain and may vary by geographic region. The possible effects, as described in various

public accounts, could include changes in rainfall patterns, water shortages, changing storm patterns and intensities,

and changing temperature levels that could adversely impact their costs and business operations and the supply and

demand for leaf tobacco. Their operations also rely on dependable and efficient transportation services. A disruption

in transportation services, as a result of climate change or otherwise, may also significantly impact their results of

operations.

Tobacco crops are subject to vagaries of weather and the environment that can, in some cases, change the

quality or size of the crops. If a weather event is particularly severe, such as a major drought or hurricane, the affected

crop could be destroyed or damaged to an extent that it would be less desirable to manufacturers, which would result

in a reduction in revenues. If such an event is also widespread, it could affect their ability to acquire the quantity of

tobacco required by their customers. In addition, other factors can affect the marketability of tobacco, including,

among other things, the presence of excess residues of crop protection agents or non-tobacco related materials. A

significant event impacting the condition or quality of a large amount of any of the crops that we buy could make it

difficult for us to sell these products or to fill customers’ orders.

Consumer Risk

If their customers significantly alter their requirements for tobacco volumes from certain regions, they may

have to change their production facilities and alter their fixed asset base in certain origins. Permanent or long-term

reduction in demand for tobacco from origins where they have operations may trigger restructuring and impairment

charges. They may also need to make significant capital investments in other regions to develop the needed

infrastructure to meet customer supply requirements.

Regulatory Risks

Increased Government Regulatory Risk

The U.S. Federal Government and certain state and local governments have proposed actions that may have

the effect of reducing U.S. consumption of tobacco products and indirectly reducing demand for their products and

services. These actions include:

Restrictions on the use of tobacco products in public places and places of employment

Legislation authorizing the U.S. Food and Drug Administration (the “FDA”) to regulate the

manufacturing and marketing of tobacco products

Increases in the federal, state, and local excise taxes on cigarettes and other tobacco products

The policy of the U.S. government to link certain federal grants to the enforcement of state laws

restricting the sale of tobacco products

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Numerous other legislative and regulatory anti-smoking measures have been proposed at the federal, state,

and local levels. About 5% of cigarettes manufactured worldwide are consumed in the United States.

A number of foreign governments and global non-government organizations also have taken or proposed

steps to restrict or prohibit tobacco product advertising and promotion, to increase taxes on tobacco products, to

indirectly limit the use of certain types of tobacco, and to discourage tobacco product consumption. A number of such

measures are included in the Framework Convention on Tobacco Control (“FCTC”), which was negotiated and

promoted globally under the auspices of the World Health Organization (“WHO”). It is difficult predict the extent to

which the efforts of governments or non-governmental agencies to reduce tobacco consumption might affect the

business of their primary customers. However, a significant decrease in worldwide tobacco consumption brought

about by existing or future governmental laws and regulations would reduce demand for tobacco products and services

and could have a material adverse effect on their results of operations.

Sourcing Risk

The WHO, through the FCTC, has created a formal study group to identify and assess crop diversification

initiatives and alternatives to growing leaf tobacco in countries whose economies depend upon tobacco production.

The study group began its work in February 2007. If tobacco growing countries in emerging markets were to partner

with the FCTC study group and seek to eliminate or significantly reduce leaf tobacco production, UVV could

encounter difficulty in sourcing leaf tobacco to fill customer requirements, which could have an adverse effect on their

results of operations.

Certain recommendations by the WHO, through the FCTC, may cause shifts in customer usage of certain

styles of tobacco. As seen in countries like Canada and Brazil and in the European Union, efforts have been taken to

eliminate ingredients from the manufacturing process for tobacco products. Such decisions could cause a change in

requirements for certain styles of tobacco in particular countries. Shifts in customer demand from one type of tobacco

to another could create sourcing challenges as requirements move from one origin to another.

In addition, continued government and public emphasis on environmental issues, including climate change,

conservation, and natural resource management, could result in new or more stringent forms of regulatory oversight

of the tobacco industry’s activity, which may lead to increased levels of expenditures for environmental controls, land

use restrictions affecting UVV or their suppliers, and other conditions that could have a material adverse effect on

their business, financial condition, and results of operations. For example, certain aspects of their business generate

carbon emissions. Regulatory restrictions on greenhouse gas emissions have been proposed. These may include

limitations on such emissions, taxes or emission allowance fees on such emissions, various restrictions on industrial

operations, and other measures that could affect land-use decisions, the cost of agricultural production, and the cost

and means of processing and transporting their products. These actions could adversely affect their business, financial

condition, and results of operations.

Geopolit ical Risk

The international operations of UVV are subject to uncertainties and risks relating to the political stability of

the governments of tobacco growing countries, principally in developing countries and emerging markets, and also to

the effects of changes in the trade policies and economic regulations of tobacco growing countries. These uncertainties

and risks, which include undeveloped or antiquated commercial law, the expropriation, indigenization, or

nationalization of assets, and the authority to revoke or refuse to renew business licenses and work permits, may

adversely impact their ability to effectively manage their operations in those countries. For example, UVV has

substantial capital investments in South America and Africa, and the performance of their operations in those regions

can materially affect their earnings. If the political situation in any of the countries where they conduct business were

to deteriorate significantly, their ability to recover assets located there could be impaired. To the extent that they do

not replace any lost volumes of tobacco with tobacco from other sources, or they incur increased costs related to such

replacement, their fiscal position or results of operations, or both, would suffer.

Taxation Risk

Through UVV’s subsidiaries, they are subject to the tax laws of many jurisdictions. Changes in tax laws or

the interpretation of tax laws can affect their earnings, as well as the resolution of various pending and contested tax

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issues. In most jurisdictions, they regularly have audits and examinations by the designated tax authorities, and

additional tax assessments are common.

Financial Risks

Uncollectable Account Risk

UVV extends credit to both suppliers and customers. A significant bad debt provision related to amounts due

could adversely affect their results of operations. In addition, crop advances to farmers are generally secured by the

farmers’ agreement to deliver green tobacco. In the event of crop failure, delivery failure, or permanent reductions in

crop sizes, full recovery of advances may never be realized, or otherwise could be delayed until future crops are

delivered.

Exchange Rate Risk

UVV accounts for most of their tobacco operations using the U.S. dollar as the functional currency. The

international tobacco trade generally is conducted in U.S. dollars, and they finance most of their tobacco operations

in U.S. dollars. Although this generally limits foreign exchange risk to the economic risk that is related to leaf purchase

and production costs, overhead, and income taxes in the source country, significant currency movements could

materially impact their results of operations. Changes in exchange rates can make a particular crop more or less

expensive in U.S. dollar terms. If a particular crop is viewed as expensive in U.S. dollar terms, it may be less attractive

in the world market. This could negatively affect the profitability of that crop and their results of operations. In certain

tobacco markets that are primarily domestic, the local currency is the functional currency. Examples of these markets

are Hungary, Poland, and the Philippines. Similarly, the local currency is the functional currency in other markets,

such as Western Europe, where export sales have been denominated primarily in local currencies. In these markets,

reported earnings are affected by the translation of the local currency into the U.S. dollar.

They have used currency hedging strategies to reduce their foreign currency exchange rate risks in some

markets. In addition, where they source tobacco in countries with illiquid or nonexistent forward foreign exchange

markets, they often manage their foreign exchange risk by matching funding for inventory purchases with the currency

of sale and by minimizing their net investment in these countries. To the extent that they have net monetary assets or

liabilities in local currency, and those balances are not hedged, they may have currency remeasurement gains or losses

that will affect their results of operations.

Interest Rate Risk

In their business, customers may either pre-finance purchases or pay market rates of interest for inventory

purchased on order. From time to time, they borrow long-term debt at fixed rates. Through hedging agreements, they

may swap the interest rates on their existing fixed-rate debt to floating market interest rates to better match the interest

rates that they charge their customers. To the extent they are unable to match these interest rates, a decrease in short-

term interest rates could increase their net financing costs. In addition, at times they may have significant amounts of

cash invested. Decreases in short-term interest rates reduce the income they derive from those investments. Changes

in interest rates also affect expense related to their defined benefit pension plan, as described below.

Pension Obligation Risk

UVV sponsors domestically defined benefit pension plans that cover certain eligible employees. Their results

of operations may be positively or negatively affected by the amount of expense they record for these plans. U.S.

generally accepted accounting principles (GAAP) require that they calculate expense for the plans using actuarial

valuations. These valuations reflect assumptions about financial market and other economic conditions that may

change based on changes in key economic indicators. The most significant year-end assumptions they used to estimate

pension expense for fiscal year 2014 were the discount rate and the expected long-term rate of return on plan assets.

In addition, they are required to make an annual measurement of plan assets and liabilities, which may result in a

significant change to shareholders’ equity through a reduction or increase to the “Pension and other postretirement

benefits plan” component of Accumulated Other Comprehensive Loss. At the end of FY2014, the projected benefit

obligation of their U.S. pension plan was $208 million and plan assets were $194 million. Although GAAP expense

and pension funding contributions are not directly related, key economic factors that affect GAAP expense can also

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affect the amount of cash they are required to contribute to their pension plans under requirements of the Employee

Retirement Income Security Act. Failure to achieve expected returns on plan assets could also result in an increase to

the amount of cash they would be required to contribute to their pension plans. In order to maintain or improve the

funded status of their plans, they may also choose to contribute more cash to their plans than required by ERISA

regulations.

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Investment Summary

Recommendation: Hold

While UVV currently trades at a discount to its book value, this discount is not the result of an overreaction

to company related news or investor psychology, but rather a change in the short term outlook of the tobacco

market. With an oversupply of tobacco that will persist into FY2015, there is a high probability that UVV’s net

income will be impaired, potentially making Net Income Applicable to Common Shareholders negative for one, or

more, of the next four quarters. This, combined with UVV’s current dividend policy, will result in the depletion of

its asset value, lowering the firms’ intrinsic value with respect to this valuation.

Moreover, since this oversupply of tobacco will persist for another year, it is expected that the share price

of UVV will continue to decline over the next year. My recommendation is to keep a close eye on both the

underlying fundamentals and share price of UVV. If the share price of UVV drops below 50% of its asset value

(roughly $30 per share), I would begin buying shares in small amounts over a three month period, creating an

opportunity to average downward if the share price continues to decline. If there is evidence of supply returning to

equilibrium levels, and projected tobacco prices for the next fiscal year increasing, I would enter a position in UVV.

The underlying assumption is that both the top and bottom lines of UVV will increase to their historical levels and

concordantly, so will the share price.