British American Tobacco
has been under pressure because effective public health campaigns have led to restrictions on smoking in public places and changed the way its products are marketed.
The stock (ticker: BATS.UK) has fallen 26% over the past three years to 25.36 pounds sterling ($ 34.60), along with its peers
(2914.Japon), down 27.39%, and
(MO), which lost 28.12%.
The Food and Drug Administration announced in April a ban in the United States on flavored cigars and menthol cigarettes, the latter of which generate 25% of the profits of the BAT group, according to estimates by broker Jefferies. The uncertainty surrounding the implementation of the ban also weighed on the stock.
But the maker of Lucky Strike and Newport invested £ 430million in new products in 2020, including the Vuse electronic cigarette, glo tobacco heated products and Velo nicotine sachets. While non-combustible products (those that don’t involve the burning of tobacco) account for just 12% of overall revenue, new CEO Jack Bowles said BAT’s new products are expected to skyrocket this year.
In June, the company raised its annual growth forecast to more than 5%, from 3% to 5% previously. Over 2.6 million new users of what BAT calls “low risk products” were added during the first half of the year, amounting to 16.1 million. BAT estimates that it will bring that number of users in this category to 50 million by 2030 and reach £ 5 billion in sales for this part of the business by 2025.
Laura Parisot, an analyst at independent research firm Alpha Value, predicts the stock could rise 75% to £ 44.34. She said in a recent memo that new category activity had “impressive growth” of 37% in 2019. “There is no doubt that growth will continue in this segment,” she wrote.
Jonathan Leinster, an analyst at Societe Generale, has a buy rating and a more modest price target of £ 36. The resumption of the share buyback program in 2022 and the growth in sales of new products “will be a positive catalyst for equities”.
BAT sells over 200 brands in over 180 markets. It has a market value of £ 58 billion and employs over 55,000 workers. The stock has a low multiple of 7.3 times this year’s expected earnings and is rated in line with its peers.
BAT posted a pre-tax profit of £ 8.6bn for 2020 on revenue of £ 25.8bn. This compares to £ 7.9bn in pre-tax profit in 2019 on sales of £ 25.8bn.
“There is a great momentum in the business,” Bowles said. Barron, adding that the company is on track to meet its targets of £ 5 billion in new categories revenue by 2025 and 50 million non-fuel consumers by 2030. “We are building strong global brands of the future with Vuse, Velo and glo, ”he says.
Traditional stick cigarettes, however, are still an important part of the business. There are 1.1 billion fuel customers, despite gradually declining sales volumes over the years.
Developing countries contribute around 70% of the company’s cigarette volume and could be a growth spark. BAT has its sights set on Pakistan, Bangladesh and Vietnam, each of which has a more flexible approach to tobacco regulation.
Another boost for the company is its cost reduction program called Quantum. Parisot of Alpha Value says it is expected to generate between £ 1 billion and £ 1.5 billion in efficiency over the three years to 2022. BAT has a strong dividend policy, with a high yield of 8.8% and 23 years of dividend growth.
These payments should satisfy investors as the cigarette market evolves.