Fundamental Insights About The British American Tobacco Giant (BATS)

Overview

British American Tobacco (Ticker symbol: BATS) is a British multinational tobacco and next-generation products company, headquartered in London, United Kingdom. The company founded in the year 1902 and over the years has transformed into one of the world’s biggest consumer goods companies and is often amongst the top five corporations on the London Stock Exchange. The company merchandises its products in more than 200 countries worldwide, covering six continents, and were market leaders in more than 55 countries in 2017.

In July 2017, the company acquired remaining 57.8 per cent stake of Reynolds American Inc., helping it to increase its global presence and making it one of the primary players in the US region as well. Total employees’ headcount is around 55,000 spread globally. Richard Burrow, who is the current Chairman since November 2011, joined the Board as a Non-Executive Director in September 2009. Nicandro Durante has been serving as the Chief Executive since March 2011.

Segments and Products

The company’s business operations spread across the United States; Europe and North Africa (ENA); Asia-Pacific and Middle East (APME); Americas and Sub-Saharan Africa (AMSSA). Highest revenue contribution comes from the United States market segment. The company’s heritage is in cigarettes and boasts of world-famous brands like Dunhill, Lucky Strike, Kent, Pall Mall, Rothmans and many others. Now the customers taste, and preferences are inclined towards new cigarette and nicotine products to enjoy something fresh. The company sees this as an opportunity and seeks to provide less-risky products to consumers - an ambition it calls “Transforming Tobacco” and includes tobacco heating products, vapour, and nicotine products.

Strategic Portfolio

• From 1^st January 2018, the Group introduced a new measure named Revenue Growth of Strategic Portfolio, consists of:
  • Kent, Dunhill, Lucky Strike, Pall Mall and Rothmans (previously referred to as the Global Drive Brands, or GDBs);
  • the 3 leading brands from the US combustibles business (Camel, Newport and Natural American Spirit);
  • Potentially Reduced Risk Products portfolio, including our NGP business of THP and vapour, as well as the snus and moist snuff brands.

Financial Metrics – H1 FY 2018 (£ million)

(Source: Company Fillings)

(Source: Company Fillings)

Key Financial Results (1H FY 2018)

• Revenue increased by 56.9 per cent in the first six months of the financial year 2018 as compared to last year; revenue from the strategic portfolio up 128 per cent.
• Reported volume from cigarettes and THP rose by 11.0 per cent in the first half of FY 2018.
• Profit from operations surged by 72.4 per cent in the first six months of FY 18 against the first half of the last financial year 2017; operating margin rose by 340 basis points to 38.1 per cent in 1H FY 2018.
• Adjusted revenue at constant rates, increased by 1.9 per cent with revenue from the strategic portfolio up by 8.5 per cent.
• On a representative basis, Cigarettes and THP volume declined by 2.2 per cent in the first six months of FY 2018 as compared to last year 1H FY 2017.
• Adjusted profit from operations at constant rates increased by 2.4 per cent, while adjusted operating margin surged by 50 basis points at current rates.
• Basic EPS decreased 3.4 per cent in the first half of the financial year 2018 and adjusted diluted EPS increased 10.4 per cent at constant exchange rates.
• Total borrowing in the first half of financial year declined by 1.9 per cent to £48,512 million against last year.

Key Ratios

(Source: Thomson Reuters)

Ratio Commentary

• The company’s profitability ratio is significantly more than the industry, showing better margins and operational efficiency.
• Liquidity position is not favorable as of its peers, which signifies current assets are not enough to meet its short-term obligations.
• The company is highly leveraged than the industry, though it is inching towards the industry’s median.

Share Price Performance

 (Source: London Stock Exchange)

Share Price Commentary

• On 15th February 2019, BAT share closed at GBp 2,859.0, up by 1.26 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBp 4,509.50/GBp 2,336.50. At the closing price, the share was trading 36.6 per cent lower than its 52w High and 22.36 per cent higher than its 52w low. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 9.8x as compared to the industry median of 15.1x.

Risks Assessment and Growth Prospects

• The company enjoys vast geographical diversity, helping it to avert political and economic instability in any one region.
• The resilient and reliable nature of tobacco demand augurs well for its sales.
• The ratification of new rules and regulation poses a serious threat to market or launch products. This threat mainly is seen for new products like vapour.
• The company faces severe foreign currency translation risks due to exchange rates volatility.