British American Tobacco plc Ordinary 25p (BATS)

Company overview

British American Tobacco PLC is a global tobacco company headquartered in London. It is the world’s second largest quoted tobacco company by global market share, with leading positions in more than 50 countries and a presence in more than 180 countries. The group’s core activity is the production, marketing and sale of cigarettes and other tobacco products. Brands include Dunhill, Rothmans, Pall Mall, Benson & Hedges, Kent, Lucky Strike and John Player Gold Leaf. The company is listed on the London Stock Exchange and is a constituent of the FTSE 100 index. It also maintains a secondary listing on the Johannesburg Stock Exchange.

HL Comment (26 October 2011)

British American Tobacco said it had performed well, increasing market share across its major markets, in an interim statement published today (26Oct). Group volumes were slightly lower than last year as a result of a general decline in industry volume, although there are signs that this is moderating, added the group. BAT reported organic revenue growth of 7% at constant rates of exchange in the nine months to the end of September. The company’s four Global Drive Brand volumes grew by 8%. Kent was up 9%, growing in all of its top ten markets, driven by Russia, Romania and Ukraine. Dunhill was only slightly higher than last year with strong performances in many markets, such as the Gulf Cooperation Council (GCC), Taiwan and Brazil, offset by the adverse impact of pricing activity in South Korea. Good performances in Pakistan, Russia, Germany and Romania contributed to a 12% increase in Pall Mall volumes. Lucky Strike was up 9% following good growth in Germany, France, Argentina and Chile. In upbeat outlook comments, the group reinforced its stance that it is “on track for another good year of earnings growth”.

Negative Points:

• BAT could suffer from large excise tax rises.
• The risk of litigation remains an ongoing threat.
• Foreign-exchange risk is significant for BAT. If some of its emerging market currencies fall, it may be subject to worse-than-expected transactional headwinds.
• The integration of the recently acquired businesses in Turkey, Scandinavia and Indonesia may be problematic.

Positive Points:

• The Group resumed a share buy-back programme from the beginning of March 2011. During the nine months to 30 September 2011, 23 million shares were bought at a total cost of £622 million.
• In a transaction valued at $452 million, BAT acquired 100% of the privately owned Productora Tabacalera de Colombia, S.A.S. (Protabaco), the second largest cigarette company in Colombia. The transaction was completed on 12 October 2011 and was financed from internal resources, added management.
• Management confirmed sufficient financing was in place. A revolving credit facility of £2 billion was undrawn as at 30 Sept.
• BAT has by far the greatest geographical diversification of any tobacco company.
• The company’s dividend policy is both progressive and attractive for the investor in a current low interest rate environment.

Consensus:

On balance, market consensus indicates a buy.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: British pound.