Down in smoke: Is it too much of a fag to invest in BAT?


Down in smoke: Is it too much of a fag to invest in BAT?

Vaping is all the rage but chairperson says traditional cigarettes remain at the core of the business

Marc Hasenfuss and Michelle Gumede

Cigarette giant British American Tobacco (BAT) aims to more than double its revenue from Next Generation Products (NGPs) by the end of 2018 to “substantially more than £1-billion (about R17.35-billion)”.
NGPs comprise vapour and tobacco heating products as well as oral tobacco and nicotine products such as snus and moist snuff. These smokeless products are largely seen as “less risky” tobacco and nicotine offerings to traditional cigarettes.Speaking at BAT’s AGM in London on Wednesday, chairperson Richard Burrows said the group’s tobacco heating product, “glo”, was already demonstrating this opportunity in Japan and now had grown to a 4.3% share of the total market.
He said this was achieved despite capacity constraints limiting the supply of heating devices. “We remain confident that these constraints will be removed during the second quarter.”
Burrows said that BAT’s success in NGPs had prompted a further increase in investment plans during 2018 with a significant number of roll-outs and launches planned towards the end of the third quarter.
Burrows, however, stressed that notwithstanding the good progress BAT was making with NGPs, traditional cigarettes would remain at the core of the business for many years to come – “delivering growth today and providing the funds required for investing in the future”.He said BAT’s market share market share, revenue and profit all grew in 2017 with total group cigarette and tobacco heating product volume grew 3.2% to 686 billion compared to an industry decline of 3.5%.
“We are the only company growing share in all key product categories – in vapour, tobacco heating, oral tobacco and combustible cigarettes.”
Looking ahead to the 2018 financial year, Burrows said foreign currency exchange rates would be a headwind for the business.
“If rates were to stay at current levels, BAT would face a translational foreign exchange headwind of 7% on organic operating profit and 8% on earnings per share.”
He reminded shareholders that volume shipment phasing and pricing in certain markets would mean profit being skewed to the second half.
Burrows reckoned BAT remained on track for another good year of earnings growth – excluding the effect of currency translation.Share price doesn’t mirror BAT’s corporate smoke
BAT’s share price has dropped 22% since January, spooked by the global de-rating of tobacco companies and rival Phillip Morris’s poor financial performance.
On Friday Phillip Morris’s share price plunged 18% after its latest earnings report showed that $4.5-billion was spent on four new products that are failing to win over new customers.  BAT’s stock fell 12% last week.
“The problem with this business is primarily centred around valuation and sentiment,” said Casparus Treurnicht, a portfolio manager at Gryphon Asset Managers.Recently the BAT share price has been trading in the lower echelons of its range, having reached what the Nasdaq flagged recently as “oversold”.
This is when a stock falls below 30 on the Relative Strength Index (RSI)- a technical indicator tool used to measure momentum on a scale of zero to 100. BAT’s RSI reading hit 24 last week.
The tobacco industry is caught in the crossfire between healthy living trends and the uncertainty that clouds the science behind Next Generation Products.
The major factor is the global de-rating of global tobacco companies, with most of BAT’s US-listed peers down over 20% over the past 12 months, said Peter Takaendesa, a portfolio manager at Mergence Investment Managers.
Volumes were squeezed because of regulation, healthy living, competition and overcapacity. Yet despite the rocky road, BAT has managed to consistently pay out dividends to shareholders. 
“This places a big question mark over the sustainability of BTI’s model and how they will continue to pay those lofty dividends as in the past,” said Treurnicht.

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