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.

British American Tobacco