8th Dec 2022 14:39
(Alliance News) - While British American Tobacco PLC's shares dipped on Thursday, analysts maintain the stock is still a strong performer, as the firm doubles down on its push into new product categories.
The London-based maker of cigarettes and vaping products said new product launches and innovations had enabled the group to add another 3.2 million consumers within its non-combustible franchise in the nine months that ended September 30, reaching 21.5 million.
The Dunhill and Kent maker said it was investing in New Categories, driving growth, while making progress in reducing operating losses. The business includes vapour products, tobacco heating products, and oral nicotine pouches.
It remains confident of hitting revenue targets of GBP5 billion and profitability for the business by 2025.
"As the industry recognises the longer term need to lessen the reliance on traditional tobacco, switching towards the fast-growing "New Category" products area, the signs for BAT are encouraging," said interactive investor's Richard Hunter.
In its combustibles business, BAT expects its targeted portfolio of brands across price tiers to deliver a robust performance across Asia-Pacific and Middle East, Americas and Sub-Saharan Africa, and Europe, driven by resilient volumes.
In the US, however, industry volumes remain under pressure due to ongoing macro-economic factors and post-Covid normalisation of consumption patterns, the company said.
"Across the pond, a prolonged period of inflation is starting to impact consumer behaviour, with early signs of accelerated downtrading in the industry in the second half of the year. BAT will be upping its marketing efforts here but it's too early to say if it can slow this trend," Hargeaves Lansdown's Derren Nathan considered.
"The nature of the products allows for strong pricing power without destabilising demand, and this largely offsets some of the issues the group is facing," ii's Hunter added.
Despite the pressure in the US, BAT's outlook for global tobacco industry volumes in 2022 improved. It previously expected a decline of 3.0% back in July, citing drops in the US and Turkey, as well as uncertainty stemming from the war in Ukraine. It now expects a decline of just 2%.
This is driven by a "continued post-Covid recovery in emerging markets", BAT explained.
For the year, net finance cost is estimated above GBP1.6 billion due to higher interest rate rates and the strong dollar.
But a stronger dollar isn't all bad news for BAT, given that it will boost its earnings on repatriation, and an foreign exchange tailwind of around 7% will drive annual profit higher, Hunter noted.
BAT Chief Executive Jack Bowles said the company was confident in delivering its 2022 guidance. The firm guided for 2% to 4% growth in revenue at constant currency rates for all of 2022. It projects mid-single figure adjusted diluted earnings per share growth at constant currency, including a transactional currency headwind, of 2%.
Despite the largely positive update, shares in BAT fell 2.9%, trading at 3,310.75 pence on Thursday afternoon in London.
"Of course, there are also concerns which have tended to overhang the industry. Litigation has been a sporadic issue over the last decade, while regulation remains on the minds of governments worldwide with health benefits in mind. From an investment perspective, the sector has more recently been overlooked by some investors who are simply unable to enter the fray on ethical grounds," Hunter continued.
However, for investors willing to look past such concerns, Hunter maintains there is plenty to like. He pointed to the BAT's "extraordinary" cash generations, which has enabled a "prolonged growth" of its dividends.
"Nor does the largesse of shareholder returns end there, with a previously announced share buyback programme of GBP2 billion leading to hopes that something similar could follow this year," Hunter noted.
Given BAT's positioning as a defensive stock, it has also benefitted from the recent market volatility. Its shares are up by over 20% in the last year, outpacing the 2% growth of the FTSE 100 index.
"However unfashionable they may be, propelled by strong cash generation, inelastic demand and generous dividend yields, the likes of British American Tobacco are having their own day in the sun at present," Hunter concluded.
"The market consensus of the shares as a strong buy [is] likely to remain intact."
By Elizabeth Winter, senior markets reporter; and Artwell Dlamini, Alliance News reporter
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