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British American Tobacco - A strong performance

Nicholas Holt | 28 July 2016 | A A A
British American Tobacco - A strong performance

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British American Tobacco plc Ordinary 25p

Sell: 2,655.00 | Buy: 2,656.00 | Change -30.00 (-1.12%)
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Shares in British American Tobacco (BATS) are trading broadly flat this morning, after the group announced results for the half year to 30 June 2016. The interim dividend increases 4% to 51.3p.

Revenues grew 7.8% at constant exchange rates (CER), with adjusted earnings per share up 13.4% to 113.6p. Adjusted profit from operations was up 1.8% (CER) at £2,551 million, up 8% excluding transactional currency headwinds.

Cigarette volumes grew to 332bn sticks, up 3.4% on the same period last year, and up 2.1% on an organic basis. Cigarette market share in key markets rose 30 basis points, driven by the group's Global Drive Brands which saw volumes jump 10.8%.

Within the Next Generation products portfolio Vype performed well and is now available in six markets. The Group's first tobacco heating product, iFuse, is performing ahead of expectations in its test market Romania.

Chairman Richard Burrow commented;

"With profit growth weighted to the second half of the year, we remain confident that we will deliver another year of good earnings growth at constant rates of exchange."

Our View

Emerging markets, which account for around 70% of BATS' sales, have seen their currencies depreciate sharply against the dollar over the last couple of years. That has caused a headache for BATS as higher raw material costs led to margin pressure. Lower Sterling is expected to boost profits but not enough to offset the transactional currency headwind.

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 plain packaging in the process of being introduced in France, the UK and Ireland 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 18x, a c. 30% premium to their long run average rating; with analysts forecasting 16% earnings growth this year. The prospective yield is 3.5%.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.