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In an exclusive interview with Shares the finance chief of the tobacco giant makes a compelling argument
Thursday 28 Oct 2021 Author: Mark Gardner

The fund manager of the City of London Investment Trust (CTY), Job Curtis, recently said that ‘tobacco stocks have gone back to having the pariah status that I witnessed at the beginning of my career’.

This untouchable status is reflected in British American Tobacco’s (BATS) recent share price performance. After peaking at just over £52 in June 2017, the shares have marked a steady decline and now trade in a £25 to £29 range and are currently at the lower end of this at £26.

There are two principal reasons for the stock’s current malaise. First the market has concerns regarding the rate of structural decline within the combustibles (cigarette) business.

Second, analysts have expressed reservations over how long it will take for the considerable investments in NGP (next generation products) to become profitable.


In an exclusive interview with Shares, Tadeu Marroco BAT’s finance and transformation director provides a compelling argument for why these concerns have been overdone. In addition he outlines several new and exciting initiatives that the group is pursuing, and which the market appears to have overlooked.

At the current price we think Marroco’s reasoning stands up and investors who are comfortable with the obvious ESG (environmental, social and governance) risks should buy the shares.

The market has naturally been concerned about the rate of structural decline in BAT’s core cigarette business. There has been a marginal increase in the annual rate of volume decline from 1-2% to 3%. However there are several mitigating factors which offset this.

Given the strong position of its global brands the group has been able to continually improve the price mix. Marroco suggests ‘the elasticity of cigarettes across the world is still very benign at 0.4 to 0.6’. Or in other words a 10% increase in price would lead to a 4% to 6% drop off in consumption

A newly installed revenue growth management digital tool is also helping to extract value from the cigarette business. This enables the group to manage on a very precise and granular basis all elements of price elasticity in any given geography. In addition Marroco highlights that ‘it can also help optimize promotions and the total cost of investments’.

The strength of the cigarette business is built on the group having strong global brands at every price point. Around 70% of the group’s combustibles portfolio are what it calls global drive brands. These include Lucky Strike, Dunhill, Pall Mall and Kent. In America the premium American Spirits and Newport brands have been           particularly successful.


The group’s transformation strategy has been focused on three categories: vapour, tobacco heating and modern oral. It has been successful in developing three leading brands. These are Vuse in vapour, glo in tobacco heating and Velo in modern oral (nicotine pouches).

There has been a degree of scepticism regarding the group’s ability to make vapour as profitable as cigarettes given the fragmented nature of the category.

Marroco provides an interesting counterpoint to this, noting that ‘recently BATS has been taking global value leadership share of the vapour category, under Vuse which is now the number one brand globally’.

Another factor which will further boost the profitability of vapour is the transition from a manual to an automated production process. Marroco reveals that ‘we have recently renegotiated with our major supplier to move from the manual assembly of the cartridge to an automated process’.

British American has pursued a strategy of discounting the price of devices to get its vaping product in the hands of the consumer. However it is now in a position to increase price.

Marroco is optimistic about the prospects for the group in the tobacco heating products and modern oral categories.  Glo is the group’s flagship THP product and comprises a battery powered device that heats specifically designed tobacco sticks to 240 degrees celsius. This process produces a nicotine containing aerosol with a tobacco taste which the user inhales.

The device is a single unit, with one button making it simple and intuitive to use. As tobacco sticks aren’t burned no ash is generated. 2020 marked the launch of glo Hyper. The pivotal breakthrough was in harnessing an advanced inducting heating technology to deliver record heating times.

‘In tobacco heated products glo Hyper continues to be BAT’s most successful launch yet, driving a very positive category performance, across all markets and is the fastest growing offer in the market today,’ says Marroco.

In the Modern Oral Category (nicotine pouches) the American market is benefiting from the broader range of products picked up through the acquisition of Drfyt Science in November 2020. The acquisition expands BAT’s portfolio from four to 28 product variants, providing a wide range of nicotine strengths and flavours.

Marroco says: ‘Consumers are increasingly health focused, they want to reduce their intake of sugar and salt, and alcohol consumption.

‘This has created opportunities to try new ways of enjoying nicotine. The problem is that nicotine is perceived as being the cause of numerous diseases.

‘This is not the case. This is where new science has come
in and clarified the situation for many regulators across the world’.

The key markets for the group’s modern oral products include Scandinavia, Switzerland and Czechoslovakia. In addition BATS is currently running pilots in Kenya, Pakistan and Indonesia.


According to Marroco ‘cannabis is a very interesting market with a lot of potential’. This view prompted BATS to recently acquire a stake of close to 20% in the Canada-based cannabis producer Organigram for approximately £126 million.

Founded in 2013, Organigram first began as a medical cannabis provider. Today, the company is focused on producing high quality, indoor-grown cannabis for patients and adult recreational consumers in Canada.

Marroco explains: ‘Organigram is an attempt to collaborate and have access to cutting edge research and development technology, product innovation and cannabis expertise, which complements BAT’s extensive development capabilities. ’

A centre of excellence will be established at OrganiGram’s facility in New Brunswick to focus on developing next-generation cannabis products, with an initial focus on cannabidiol or CBD. Marroco believes ‘there is considerable value in the Canadian market, which is pretty much open. The Canadian market alone represents £4 billion in value’.

America is the key potential cannabis market. Democratic lawmakers in the US have indicated their desire to decriminalise cannabis use at a national level. However the outlook remains uncertain.


The group is also benefiting from a move towards digitising the whole business. One example of how digitisation is adding value is e-commerce which has much higher margins than sales through other channels. An average e-commerce subscriber has a lifetime value of three times compared to the traditional retail customer. Around 10% of vaping revenue already comes from e-commerce and with increasing scale the group is able to negotiate better trade margins.

In a recent presentation City of London manager Curtis indicated that he has warmed to the tobacco sector and British American Tobacco is the largest holding in his portfolio. His enthusiasm is predicated on their renewed focus on next generation products, and their ability to generate prodigious amounts of cash.

Curtis believes that British American Tobacco it is trading at an attractive valuation. “It is yielding 8%, and a free cash flow yield of 14%, it is rapidly deleveraging and will be down to three times net debt to EBITDA (earnings before interest tax, depreciation and amortization) this year’. This may prompt a share buyback, which according to Curtis could provide a catalyst for a re-rating of the shares.

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