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.
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.
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