In the first quarter British American Tobacco saw cigarette volumes increase 2.4% on an organic basis (3.6% including acquisitions), representing organic market share growth of 20 basis points. Excluding the effect of inventory movements in the comparator period, like for like volume was up by 1.1%.
Organic revenue growth was 6.1% at constant exchange rates (up 7.5% including acquisitions), although currency headwinds reduced this to 1.7% at current exchange rates.
The shares rose 1% in early trading.
- The Group saw volumes improve across Asia Pacific, Western Europe and EEMEA with a small decline in the Americas.
- Global Drive Brands saw volumes increase 10.5%, including; Dunhill +5.5%, Kent +9.7%, Lucky Strike +12.6%, Pall Mall -5%, Rothmans +49.4%.
- E-cigarette Vype grew share in the UK and delivered "ahead of expectations" in Germany, France, Poland and Italy.
- Glo iFUSE, the group's first tobacco heating device, launched in its first test market, Romania, in the period.
Transactional currency headwinds mean that trading conditions remain challenging - creating an estimated full year profit headwind of around 7%. If Sterling remains at the current rate for the rest of the year the group expect a positive translational effect of 3% on earnings.
Emerging markets, which account for around 70% of BATS' sales, have seen their currencies depreciate sharply against the dollar. This has led to higher raw material costs and margin pressure, as well as reducing overseas profits when translated back into sterling.
Against this backdrop, BATS' performance has proved resilient. Its premium brands have continued to gain market share, despite the economic slowdown in developing economies. Cost cutting initiatives are also progressing well, even if currently masked by currency swings. The increasing proportion of sales and profits coming from the growing share of Global Drive Brands will also support future margins.
BATS has a great track record and generates prodigious amounts of cash, most of which can be returned to shareholders through dividends (which have grown every year since 1999) and share buybacks. It benefits from dominant market positions and sells an addictive product, which translates into tremendous pricing power.
The industry is subject to numerous regulatory risks, with the introduction of plain packaging in France, the UK and Ireland expected in May this year a good example. But BATS' geographic diversity and exposure to faster growing emerging nations should stand it in good stead in the long run.
The shares are trading on a price to earnings ratio (P/E) of 17.8x, a c. 24% premium to their long run average rating; with analysts forecasting 10% earnings growth this year. The prospective yield is 3.9%.
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