06 December 2023
If you are covering BAT’s latest financial update, please find below a comment from Chris Beckett, head of equity research at Quilter Cheviot:
“BAT's latest financial update was largely in line with expectations but was not the catalyst needed to begin to reverse the negative sentiment to the company and its very low valuation.
“Management is expecting sales growth of around 3%, with debt in the business being reduced. As a result, share buybacks will be considered should the deleveraging of the business continue as planned.
“BAT’s market share of combustible cigarettes has reduced slightly, with US performance suffering from the macroeconomic slowdown. However, this is being made up for elsewhere in the world. In new categories, vaping and modern oral are performing well, but the Glo heated tobacco brand suffered a 'disappointing' year. The company has announced a new target to generate 50% of revenues from new categories by 2035, and this will necessitate increased investment behind these brands.
“On that theme, the company will take a £25bn noncash write-down of the value of its combustibles business. Fundamentally this doesn't change the investment case but taking it as an adjustment this year will flatter future results.
“In 2024 management expect low single digit revenue and profit growth. For a stock that looks cheap and is offering a 10% dividend yield this is not awful but it will not change the narrative on the stock. The lack of a clear route to a buyback will also weigh. We continue to believe that this valuation is too low particularly compared to Philip Morris, its closest competitor.”
