25 July 2024
If you are covering BAT’s H1 2024 results, please see comment below from Chris Beckett, head of equity research at Quilter Cheviot:
“British American Tobacco (BAT) has delivered results that are broadly in line with expectations, reaffirming its guidance for the year. For a tobacco company, this kind of stability is exactly what investors want to see. In this sector, boring is good.
“BAT is currently trading at 7x earnings, offering a 9% yield. Any absence of negative surprises is a positive for the stock. Despite a decline in volumes, pricing has increased by 7%, leading to a 1% rise in organic revenue when excluding the impact of the Russian disposal, which has been a headwind.
“The business model remains typical for a tobacco company: fewer people smoking, higher prices, and a shift towards heated tobacco and vapour products. Smokeless products, including heated tobacco, vapour, and oral tobacco, now account for 18% of group revenue. While this is a step in the right direction, BAT still lags behind Philip Morris, which reported 38% of its revenue from smokeless products earlier this week. Nevertheless, BAT holds the number two position in the smokeless market.
“Margins remain flat at 45%, reflecting the cash-generative nature of tobacco stocks. The company is also making progress in paying down debt. We maintain a Buy recommendation, but our confidence would increase if BAT meets its year-end guidance for leverage and initiates a buy-back from normal cash flow. Currently, the buy-back is funded by the sale of a stake in BAT’s Indian business. A sustainable buy-back from normal cash flow, similar to what Imperial has achieved, would be more beneficial for investors.
“In a sector that is generally unloved, having a buyer of last resort in the form of the company buying back its own stock is advantageous. An increase in the buy-back at the end of the year, funded by normal cash flow, would enhance the stock’s valuation.
“In summary, BAT’s results are in line with expectations, guidance is reaffirmed, and the stock remains attractively priced.”
