We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us

British American Tobacco - On course for the full year

Nicholas Hyett | 13 December 2017 | A A A
British American Tobacco - On course for the full year

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

British American Tobacco plc Ordinary 25p

Sell: 2,542.00 | Buy: 2,543.00 | Change 12.50 (0.49%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

A brief pre-close statement ahead of full year results saw British American Tobacco (BATS) report continued growth in market share, with trading in line with expectations.

The shares rose 0.4% in early trading.

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 caused a headache for BATS as higher raw material costs led to margin pressure. However, for the first time in a long time, currencies are moving in BATS' favour, with weaker sterling more than offsetting the headwind.

Underneath the currency moves, BATS has continued to perform well. True, headline volumes are falling but that's a more or less inevitable consequence of operating in the tobacco industry.

The group has been able to offset volume declines through a combination of shifting smokers on to higher margin products and hiking prices. Dominant market position and an addictive product translates into tremendous pricing power.

However, investors should remember that tobacco is subject to numerous regulatory risks, for example the introduction of plain packaging in France, the UK and Ireland. The return to the US, following the acquisition of Reynolds, probably increases that risk.

Nonetheless, BATS has a great track record and generates prodigious amounts of cash. Most of it can be returned to shareholders through dividends (which have grown every year since 1999) and share buybacks. At present the shares offer a prospective yield of 4% next financial year.

At 16.5 times expected earnings, BATS trades on a higher multiple than UK rival Imperial Brands, on 11.6 times. However, this reflects the different characteristics of the two companies.

BATS can claim higher growth potential thanks to its exposure to faster-growing emerging markets, and is putting more resource into next generation products. The revenues from the 'heat not burn' glo brand may be insignificant in the context of the wider group at the moment, but it's the long-term potential that matters.

Pre-Close Trading Update

The business is reportedly performing well in the lead up to year end, with management confident of delivering good earnings growth at constant currency. BATS expects industry volumes to decline 4% this year, but is performing ahead of the market thanks to strong performance from the Global Growth Brands portfolio.

Organic growth in the second half reflects benefits from the phasing of shipments to certain key markets, including Pakistan. This was offset by a more difficult pricing environment in some markets, notably Russia.

The rollout of e-cigarette glo in Japan is complete, with national share now at 2.7%. glo has also been launched in Canada, Switzerland, South Korea and Russia. In vapour, share in Western Europe continues to grow and the performance of VUSE in the US remains strong.

Integration of Reynolds American is on track, with the businesses performing strongly. Perfomance has been driven by share growth and pricing.

Currency tailwinds are expected to provide a 5% boost to full year earnings per share.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 for more information.