British American Tobacco on track for a strong performance

By Sandile Mchunu Time of article published Dec 13, 2018

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JOHANNESBURG - British American Tobacco (BAT), the biggest listed tobacco company in the world, has maintained its earnings guidance for 2018, expecting full-year industry volume to decline by about 3.5percent.

The tobacco company faces headwinds in regulations, especially in the US, with weaker emerging market outlooks as conventional tobacco smoking dwindles.

However, in a trading update yesterday BAT said it would exceed its high single-figure earnings per share (Eps) growth, despite a 6percent currency impact.

BAT, which owns brands like Dunhill, Pall Mall, Kent and Lucky Strike, said de-leveraging of its business was proceeding, with net debt reducing roughly 0.4 times a year.

Chief executive Nicandro Durante said the group was on track for a strong performance in 2018, driven by both its combustible and potentially reduced risk products (PRRP) businesses.

“We remain committed to a dividend pay-out ratio of at least 65percent. We expect to exceed our high single-figure adjusted diluted Eps growth at constant rates of exchange,” Durante said.

The group expects strong growth across tobacco heating products (THP), Vapour and Oral PRRP categories.

It said THP and Vapour were expected to reach £900 million (R16.22billion) of full year reported revenue, while Glo was now in 16 international markets. Its market share in Japan continued to grow and was now 4.6percent.

In the US the group said it was performing well and in line with expectations, despite expecting industry volume decline of 4 to 4.5percent for the full year.

Shares in BAT last month went up in smoke after a report suggested that the US Food and Drug Administration could ban menthol cigarettes.

According to analysts from Barclays, menthol accounts for 36percent of the US market and generates nearly a quarter of BAT's profit.

Johnny Moloto, the head of external affairs at BAT Southern Africa, recently said millions of consumers across the globe were switching to alternative nicotine products that had the potential to significantly reduce their risk.

Analysts last year deemed BAT's $49.4billion (R708.8bn) mega merger with Reynolds as a final act in industry consolidation and had created a serious global player in the growing vapour market industry.

The deal also saw BAT leapfrog Philip Morris International as the biggest listed tobacco company in the world.

BAT’s share price has plunged by more than 40percent since the beginning of the year. It was trading around R496 a share in intraday trade on the JSE yesterday, down from R835.15 it recorded on January 2. The share price closed at R492.57 on the JSE yesterday.

Ron Klipin, a senior analyst at Cratos Capital, said the volumes decline mentioned was not unusual for BAT nor for the Industry in general.

“Conventional tobacco smoking has been declining for a good number of years in the Western world whereas consumption in the eastern hemisphere has remained resilient. So the business model has been on a positive track, showing good and consistent profit growth due to higher pricing offsetting declining volumes.”

He added that cash generation had been a strong aspect, aided by highly attractive gross profit margins, with brand power still a strong deliver.

“In addition new products in the form of vapouring and other such products are showing good growth prospects. The share price has until recently been strong, with the company dividend payout ratio of 65percent, which was a gem for investors seeking a high dividend yield.”


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