British American Tobacco optimistic about earnings growth
British American Tobacco said it expected to grow constant-currency earnings in double figures for the full year, helped by market share gains and a stronger tobacco pricing mix.
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The FTSE 100 company said its global vapour business and tobacco heating products were showing "strong growth" and expected to reach £900m of reported revenue in 2018, led by THP and with vapour on course to deliver double digit volume and constant currency revenue growth.
This was, however, a slight downgrade to its prior vaping guidance of £1bn, due to a reduction in planned year-end stocks in Japan as the THP category remains flat and the effect of the Vuse Vibe recall in the USA.
In traditional tobacco, BAT said it made "good market share gains" amid a global industry where volumes are predicted to be down around 3.5% for the year and down 4-4.5% in the USA, with a slight improvement in the second half.
Tobacco price mix is expected to exceed the 5.5% achieved in 2017, showing an improvement from the circa-4% in the first half of the year. BAT said this supported "good adjusted revenue and adjusted operating profit growth, on a constant currency representative basis, weighted to the second half of the year".
Earnings per share are expect to exceed the annual target of high single-figure constant currency adjusted diluted growth target, though this growth is expected to be impacted by a currency translation headwind of around 7%, assuming exchange rates remain unchanged for the remainder of the year. This headwind was 8% in the first half of the year and had been expected to ease to 5-6% for the full year.
Chief executive Nicandro Durante, who next year will retire after eight years in the role and nearly 37 with the company, said BAT was "on track for a strong performance in 2018" and that he was "delighted" with the progress with what the company called its "Potentially Reduced Risk Products" business.
He said the PRRP portfolio had a "great pipeline of new product launches over the coming months".
The company also revealed its deleveraging had slowed slightly due to currency effects, revising its leverage guidance mostly for this, with management now expecting to reach a ratio of net debt to EBITDA of 3.3-3.5x by the end of 2019.
BATS shares, which came close to a five-year low last week over worries about increased regulation, were dow 1.5% to 3,281.55p by midday on Tuesday.
RBC Capital Markets said it was a "bit of a mixture", with the combustible tobacco business performing as expected but NGP sales expectations reduced, the expected currency headwind increased and the de-leveraging trajectory slowed.
The THP slowdown in Japan, a "very significant market", was a concern, and analysts at the bank said: "None of this alters our view that the long term investment case at BAT (and for the industry) is very opaque compared with what we have come to expect from tobacco, although none of the shortcomings we’ve mentioned can be attributed to management."
Analysts at Liberum said they had be "nervous about the company's ambitious deleveraging guidance," so the new guidance left them feeling more assured.
"We support the increased communication and believe the upgraded constant currency adj diluted EPS guidance will be well received by the market today."