British American Tobacco on track to meet full-year expectations

The FTSE 100-listed firm’s full-year revenue on a constant currency basis is expected to meet the mid-upper half of the group’s long-term guidance for growth of 3% to 5%

British American Tobacco PLC (LON:BATS) said it is on track to meet its full-year expectations, led by strong sales of its alternative cigarette products.

The maker of Dunhill and Lucky Strike cigarettes expects revenues on a constant currency basis to meet the mid-upper half of its long-term guidance for growth of between 3% and 5%.

BATS said adjusted operating profit growth is in line with estimates, although it didn’t provide any figures.

Revenue from new category products, which include its Vype and Vuse vaping pens, is forecast to increase by 30% to 50% for the year.

Tobacco volumes fall

The sharp rise in new category revenue should offset the impact of declining tobacco sales in the group’s core US market, where BAT generates about 40% of its revenue. Globally, BATS sees the volumes of cigarettes falling 3.5% over the year.

The group predicts free cash flow after dividends of £1.5bn for the year.

BATS said it plans to consolidate its new category portfolio into fewer brands. It aims for its vaping and heated tobacco products to deliver revenues of £5bn by 2023.

“We are creating a stronger, simpler business and driving a step change in new categories, built on the foundation of a strong combustible business,” said chief executive Jack Bowles.

Tougher regulation weighs on tobacco stocks

Tobacco firms have been increasingly switching away from traditional cigarettes towards e-cigarettes and heated tobacco products as consumers become more health conscious and regulators clamp down on the industry.

However, the e-cigarettes industry faces a possible US ban on menthol, aimed at curbing youth smoking. This threat has hit the shares of tobacco companies, including BATS, which has seen its market value fall by 20% over the past year.

“The threat of ongoing litigation and regulatory overhang is an inevitable – and usually sizeable – cost of doing business in the tobacco industry and the likes of BATS have been working hard to pursue new category revenue in areas such as vaping, as tobacco volumes continue to decline,” said Richard Hunter, head of markets at Interactive Investor.

“To this end, the company is making some strong progress and whilst still significantly shy of previous levels, the shares have staged something of a recovery rally in 2019, having added around 22% although of course from a lower base.”

Debt reducing slowly

In a note to clients, analysts at Liberum Capital said: “The focus of the market will probably be the adjusted net debt/adjusted EBITDA guide, which the group says is reducing at around 0.4 per annum excluding FX, which is at the low end of the 0.4 – 0.5x range that the group targets.

“New Category revenue seems to suggest some softness as growth in 1H is ‘approaching our FY guidance range’ and the group confirms they expect an acceleration in H2, ‘leading to FY growth around the middle of the 30-50% guidance range’.”

However, the analysts added; “While one could read these above points as softer than expected, expectations are already quite muted.”

Liberum repeated its ‘buy’ rating and 3,000p target price on BATS as it trades on a 9.6% FCF (free cash flow) yield.

In afternoon trading, shares in BATS were 4.6% lower at 2,930p.

Source – Proactive Investors