6th Jun 2023 11:02
(Alliance News) - British American Tobacco PLC on Tuesday said it will make no change to strategy under its new chief executive, but despite the company's confidence, analysts warned that BAT's future remains "highly uncertain".
In his first trading update since taking over as CEO, following the sudden resignation of Jack Bowles in May, Tadeu Marroco said: "Let me address a frequently asked question: Will there be a change in our strategy? No. I am clear that the strategy we created in 2019 is right. I am confident that we can execute it successfully."
The cigarette maker's new strategy centres around non-combustible "reduced-risk products" for smokers.
BAT said that for the first quarter of 2023, it saw an increase of 900,000 customers for its non-combustible products, which are part of its New Categories unit. However, it said that its tobacco heating product, glo, saw an "underwhelming" start to the year.
As a result, Charlie Huggins, manager of the Quality Shares portfolio at Wealth Club and a BAT shareholder in his personal portfolio, said it was hard to describe BAT's future as "anything other than highly uncertain".
"Its high margin, core combustibles business is in steady decline, with scope for that decline to accelerate as the shift to reduced risk Next Generation Products gathers pace. And while BAT has made progress with its transition to NGPs, it still has a long way to go to convince investors that the margins and returns can come close to combustibles," Huggins said.
"Adding to the uncertainty for investors is the surprise departure of Jack Bowles as CEO last month. A change of CEO isn't normally a sign of a strategy going swimmingly well."
Russ Mould, investment director at AJ Bell, was equally cautious of BAT's shift to non-combustible products: "Tobacco companies are pinning their hopes on mass take-up of next generation products such as vaping, yet they face considerable pushback from regulators, health campaigners and more.
"Each week there seems to be someone else calling for tougher rules on vaping, in particular, with children's doctors the latest to say the rules have to change," he said, adding that in this "modern world" BAT has a "responsibility as a good corporate citizen" to ensure its products are "not harming society".
Despite the pushback and the threat of increasing regulation, BAT said it is on track to deliver its revenue goal of GBP5 billion for its New Categories segment in 2025 and added it is eyeing profitability for the segment in 2024.
For 2022, BAT had reported New Categories revenue of GBP2.89 billion, up 41% annually from GBP2.05 billion.
Less positively, BAT expects global tobacco industry volumes to be down by around 3% this year. Consequently, the firm expects 3% to 5% constant currency revenue growth for itself, with a second half weighting.
In 2022, revenue had grown 7.7% to GBP27.66 billion from GBP26.68 billion, or 2.3% on a constant currency basis.
For constant currency adjusted diluted earnings per share, BAT expects mid-single figure growth, with a 2% or so transaction foreign exchange headwind.
In 2022, adjusted diluted earnings per share had increased 13% to 371.4 pence from 329.0p.
Derren Nathan, head of equity research at Hargreaves Lansdown, said that BAT "has its work cut out" to keep profits moving in positive territory, given its performance in the New Categories segment is a "little mixed" and that the traditional tobacco market is "shrinking".
He warned that the company is going to need to see "quite an uptick" in the second half if it is to meet these targets.
Richard Hunter, head of markets at interactive investor, was more optimistic: "For the traditional products, which still prop up the business overall, there are signs of ongoing resilience. The nature of the products allows for strong pricing power without destabilising demand, which offsets some of the issues the group is facing."
Wealth Club's Huggins agreed, arguing that "fundamentally" BAT is still a "hugely" cash generative business, with the firepower to invest in its transition whilst also returning cash to shareholders.
"If the new CEO can accelerate that transition, whilst keeping the cash flowing into shareholder's coffers, there is scope for a recovery in sentiment," he concluded.
Shares in British American Tobacco were 0.6% higher at 2,586.00 pence on Tuesday morning in London. The stock is 23% lower in the year-to-date, however.
By Heather Rydings, Alliance News senior economics reporter
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