British American Tobacco is one of the ‘big three’ global cigarette producers, with its most well-known brands including Dunhill, Camel and Rothmans.
The company operates in over 175 markets, with the US being the largest by revenue, followed by Europe and Asia Pacific.
As part of its transition away from traditional cigarettes, BATS is focusing on developing a range of non-combustible products. Its vaping brand, Vuse, is a global market leader, and other ‘next-generation’ products include the glo and Velo brands.
HL’s Mr Nathan comments: “New categories, like vapes, are growing very quickly. The division is currently loss-making but management expects it to reach profitability in 2024.
“However, one risk is the prospect of regulatory restrictions. Further question marks remain over regulatory authorisation of some of the group’s vaping products in the US. Any rejections of key marketing approvals are likely to weigh on sentiment.”
The company’s share price showed positive momentum in the first half of 2022, hitting a three year high, but has fallen by more than a quarter since then.
Mr Nathan comments: “Sales are under particular pressure in its largest market, the US, as consumers down-trade to some of BATS’ cheaper brands in the face of challenging economic conditions.”
In terms of outlook, ESG (environmental, social and governance) concerns remain centre-stage for potential investors.
Mr Nathan adds: “Many institutional investors can’t, or won’t, invest in the tobacco sector. That can keep a lid on the valuation which, at under 7 times forward earnings is at a 10-year low, partly reflecting disappointment that the share buyback has been paused.
“Should value stocks come back into vogue, BATS will likely be on investors’ radar. But the key attraction for now is the 10% prospective yield, which should be sustainable if guidance for an improved second-half can stay alight.”
