British American Tobacco is on track to deliver full year results in-line with guidance. Revenue growth is expected between 2-4%, with mid-single digit growth in underlying earnings per share.
Traditional tobacco products gained market share in the first half, especially in the US. The group benefitted from higher prices, which were partly offset by business from lower revenue countries. The global tobacco industry is expected to see volumes down around 3% this year, driven by "continuing global uncertainty".
New Categories, which includes reduced risk products, saw revenue and volume growth across all three brands: Vuse, Velo and Glo. Losses in the division continue to fall and the group remains on track to deliver £5bn revenue by 2025.
Despite "increasing global uncertainty and disruption, further exacerbating inflationary pressures on supply chains, impacting consumer consumption and resulting in increased finance costs.", Jack Bowles, CEO, said he remains "confident in delivering on our current financial targets".
The shares were unmoved following the announcement.
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Our view
Tobacco consumption in developed markets has been in decline for decades. However, the sheer size of BATS' sales is still mind-blowing, with revenue expected in the region of £27bn this year.
That scale combined with incredible pricing power has resulted in operating margins other consumer goods companies can only dream of. And, with relatively low capital requirements, the group's delivered prodigious amounts of cash despite falling volumes.
A lot of that cash is currently tied up in stabilising a balance sheet that's carrying considerably more debt than we would like, though it's moving in the right direction. But it still leaves a sizeable surplus that can be returned to shareholders through dividends (which have grown every year since 1999 to date) and a £2bn buyback programme. Remember though, no returns are ever guaranteed.
BATS is notable for its significant emerging market exposure, especially in Latin America and Asia which is a potential advantage when it comes to growth. But it also has a strong position in the US, and that's a market with a surprising amount of potential. There's room for BATS to push up prices and grow margins, and since the US is by far the group's biggest region by revenue that would be good news for profits.
However, the tobacco industry isn't having things all its own way stateside.
Increasing regulation, particularly in US menthol, is a potential worry. There's been talk of banning menthol cigarettes completely, and given the dominant position of BATS' Newport Brand, this would be an unwelcome blow. The UK, EU and Turkey have already made the move, although the impact has been "immaterial" as smokers just switched to other products. Investors may hope the group can similarly weather a US ban.
The major question facing the group, and the whole industry, is how it can attract and retain consumers who are becoming ever more health conscious. That's why BATS has decided to spend big on New Categories like e-vapour and heated tobacco. Growth's been impressive and having three strong, market leading, brands give an edge over competition. The division is loss making, but those are reining in and profits are expected to start in 2025.
A valuation of 9.7 times future earnings is significantly below its longer-term average. Though any major re-rate seems unlikely for now while regulatory risks loom and the core business is ultimately propped up by an industry in decline. The other important thing to consider with tobacco stocks is that many institutional investors can't, or won't, invest in the sector. This may mean that the shares are rated lower than the outlook for the industry really warrants, but it's hard to see attitudes changing.
However, for investors that are prepared to accept some extra risk and have faith that products like vape and heated tobacco can scale to levels similar to traditional tobacco products, BATS is one of the more exciting names. As ever, please remember nothing is guaranteed and investments can go down as well as up in value.
BATS key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Full Year Results (Underlying and constant currency, 11 February 2022)
British American Tobacco's (BATS) underlying full year revenue was £25.7bn, up 6.9% ignoring the effect of exchange rates. This reflects a 50.9% increase in increase in New Categories revenue to £2.0bn, while traditional Combustibles rose 4% to £23.7bn. Underlying operating profit rose 5.2% to £11.2bn.
BATS expects to deliver £5bn of revenue and profitability from New Categories by 2025.
A £2bn share buyback scheme has been announced, as well as an interim dividend of 217.8p per share.
Overall Combustibles revenue increased, driven by price rises, with volumes falling 7%.
US revenue rose 9.2% to £12.5bn, with a 53.3% increase in New Categories, including vaping products. Combustible revenue rose 8.1% to £10.7bn, driven by pricing. 70bn cigarettes were sold, representing a 5% volume decline. Operating profits rose 9.7% to £6.3bn.
Asia Pacific and Middle East saw Modern Oral revenue, which includes tobacco-free nicotine pouches and traditional snuff, almost triple. That fed into a 14.2% increase in New Categories revenue to £588m. Total Combustible revenues fell 2.3% to £3.8bn because of a less lucrative mix of geographic sales and competitive pricing in Australasia. Operating profit fell 1.1% to £1.8bn.
In the Americas and Sub-Sahara Africa revenue rose 7.8% to £4.1bn thanks to growth across both product types. Operating profit rose 4.3% to £1.7bn. It was a similar story in Europe and North Africa, where revenues rose 7.3% to £6.4bn, although profit dipped 1% because of ongoing investment in New Categories.
Free cash flow after dividend payments was £2.5bn, broadly flat compared to last year. Net debt fell almost 10% to £35.5bn.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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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