British American Tobacco
British American Tobacco released a trading update ahead of its closed period commencing 28 June 2021. The company owns traditional cigarette brands such as Lucky Strike, Pall Mall, Dunhill and Kent, as well as new generation smoking technologies like Vuse, glo, and Velo.
BTI upgraded its constant currency revenue growth outlook to over 5%, above previous guidance of 3-5%. The company has made market share gains in combustibles and in each next generation product. Whilst the combustibles category still makes up the largest revenue component of BTI, the update was positive for growth in Next Generation Products (NGP). BTI grew non-combustible products by 10% (1.4m consumers) in Q1, to reach a total of 14.9m. Their New Category products are now sold in 74 markets across 53 countries.
In the vapour category (a device which heats a liquid), BTI’s Vuse reached 31.4% market share in the Top 5 vapour markets by April.
The Tobacco heating Product (THP) category (which are sticks heated, instead of burnt), glo achieved strong volume share growth in Europe and North Africa (ENA) driven by Hyper, with continued positive volume share momentum in Japan. glo’s THP category volume share of consumables in the Top 9 THP markets reached 16.2% in the period ended April.
The Modern Oral category (in which pouches are placed under the lip) saw BTI’s Velo brand consolidate volume share to reach 40.2% of the Top 5 markets in April. A strong performance coming from the US, Sweden and Norway for that category.
Expectations for mid-single digit adjusted diluted constant currency EPS growth remains unchanged. Forex is however now expected to be an 8% headwind at EPS level from 7% previously. The company is not expecting a recovery in Global Travel Retail until 2022. Leverage guidance was also unchanged and is expected to reduce to around 3x Adjusted Net debt / Adjusted EBITDA by year end.
There was also mention of Environmental, Social and Governance (ESG) being an important strategy, with the company having set specific goals (and social benefits) to achieve a carbon neutral objective by 2030. ESG has been an important theme, with companies who are not ESG compliant being denied funding by banks and excluded from certain indexes and funds. BTI’s Vuse product was independently confirmed as the first global carbon neutral vape. Refinitiv ranked BTI as the third highest ESG-rated FTSE100 company recently.
British American Tobacco is a high quality business which is trading at a discount to fair value and is on PE multiple of 10. The update did not highlight any major changes to the outlook. Despite a lack of a catalyst to drive the share price currently, the dividend yield of 7.5% and stable earnings growth are attractive. Perhaps once debt levels improve the company could embark on share buybacks. An improvement in EM currencies would be beneficial, as would a postponement of any legal challenges banning Menthol products. We are holders of the stock in local portfolios, and added to holdings recently at these levels. We do however prefer Phillip Morris International for offshore portfolios and for the Cratos BCI Worldwide Flexible fund.