JOHANNESBURG – The last time I wrote about British American Tobacco (BAT), the share price was around R700, and I thought it was good value for money. What can I say now? It is approaching the R600 level, and it is hard to believe that this old stalwart is on the receiving end of such a sell-off. Whether it is deserved, is another question. When they released results for the six months to June 30, 2018, the market was not 100percent happy with the sales growth slowdown in new-generation products (NGPs). The growth was 11.7 percent, not bad at all!
The chief executive, Nicandro Durandt, assured the market of his confidence that full-year targets for these products will be exceeded, with a range of new launches in the pipeline.
BAT is one of the world's leading tobacco and NGP groups, with brands sold in more than 50 countries. BAT manages a portfolio with more than 200 brands, including the five “Global Drive Brands”: Dunhill, Kent, Lucky Strike, Pall Mall and Rothmans. They have a portfolio of innovative tobacco and nicotine-based products, offering consumers potentially less risky alternatives to conventional cigarettes.
There is still no conclusion on the possible takeover of Twisp in South Africa. In July the competition commission blocked BAT’s plans to expand into the e-cigarette market in SA, but the fight doesn't seem to be over yet.
Twisp is perceived to be the market leader and the biggest vape brand in South Africa, offering a range of styled e-cigarette devices, accessories and flavours. Twisp, established in 2008, has 66 outlets and is selling their products with other retailers and online platforms as well. This is a blow to BAT, as they have established businesses in many other countries and have a large footprint elsewhere in the world with NGP’s. The competition commission argues that BAT is already leading suppliers in Europe and the US and can potentially enter the SA market and compete with Twisp effectively.
BAT has not been the only victim - tobacco stocks, in general, have been beaten down. The switch over from traditional cigarettes to alternative lower risk technology has not been running as smooth, and regulators are also moving in with more strict legislation.
Investors are frightened that the NGP’s will not deliver the growth, but seem to forget that 94percent of BAT business is still the traditional cigarette business, which they continue to build, and still experience growth.
Although industry volumes are decreasing for conventional cigarettes, BAT managed to grow their market share by 1.6percent and increase their revenue by 8.5percent on a constant currency basis.
The inclusion of Reynolds America has doubled their revenue to £8.125 billion (R152.41bn) in the six months to June 2018. The take-over of Reynolds was finalised at the end of 2017 and places BAT in a unique position. There are many synergies to capitalise from. It makes me think of the old Warren Buffet saying: “Be fearful when others are greedy and be greedy when others are fearful.”
Thanks to the free cash flow yield the chances of the dividend being cut is very low, investors can look forward to a dividend yield of at least 4percent, pretty much in line with an after-tax money market rate. There is the risk of the rand strengthening in the future, which might cancel all the possible future benefits of holding BAT shares. Given the current conditions, it seems a little unlikely that the rand will strengthen substantially soon.
Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. BAT shares are held on behalf of clients.
The views expressed here are not necessarily those of Independent Media.