Shares in British American Tobacco (BATS) took a proper pounding after the firm lowered its full year 2023 sales outlook and said it would incur an impairment charge of around £25 billion.

Newly-appointed chief executive Tadeu Marroco explained the charge was due to ‘the current macro-economic headwinds impacting the US combustibles industry’ and a reassessment of some of its US cigarette brands which only have ‘useful economic lives over an estimated period of 30 years’.

The tobacco firm now expects group organic revenue growth to be at the low end of its 3-5% guidance at constant rates.

Meanwhile, ‘given planned investment phasing and an expected slow recovery in US macros, we also expect our performance in 2024 to be second-half weighted,’ said the company, a phrase which never goes down well with investors no matter what business the company is in.

Year-to-date the shares have fallen over 31% to the £22.90 mark, inflicting heavy losses on investors who own the shares primarily for income, but not everyone is pessimistic.

Owen Bennett, consumer analyst at Jeffries, says in a research note: ‘While we don’t agree with US concerns, you can make a legitimate case for them. That said, they’re weighing unfairly on the broader business.’

CURRENT VALUATION ‘NOT RATIONAL’

Bennett argues the company’s current market valuation is ‘not rational’, and while the downgrade was ‘unhelpful [organic revenue at the low end of their 3-5% guidance], much reflects an assumed worst case in the US that we struggle to see materialise’. In fact, says Bennett, the US dynamics mean there could be an upside risk to earnings estimates.

In its latest trading update, the chief executive affirmed the group’s commitment to ‘Building a Smokeless World’ with the aim of achieving 50% of revenue from non-combustibles by 2035.

The company’s New Categories division, which includes heated products Vuse, glo and Velo, has delivered more than £3 billion of revenue in less than a decade and should reach breakeven in 2023, moving into profit from 2024.

For all the headwinds, British American Tobacco remains a highly cash-generative business and is expected to deliver close to 100% operating cashflow conversion in 2023.

While its current priority is to maintain its gearing in a range of two to three times, with a year-end target of 2.7 times, the firm has said it will ‘continue to seek and evaluate all opportunities to enhance balance sheet flexibility, including disposals and the exit of non-strategic markets’.

As well as a progressive dividend, once the middle of the leverage range is reached the firm says it will ‘evaluate all opportunities to return excess cash to our shareholders’.

Disclaimer: The editor of this story (Ian Conway) owns shares in British American Tobacco

‹ Previous2023-12-14Next ›