British American Tobacco (LON:BATS) Reports Strong Growth in Reduced-Risk Products as Traditional Cigarette Sales Decline

British American Tobacco (LON:BATS) Reports Strong Growth in Reduced-Risk Products as Traditional Cigarette Sales Decline

British American Tobaco | LON: BATS

Research Report | July 17 2024

1. Executive Summary

British American Tobacco (BATS) remains one of the world’s leading tobacco companies, continuing to diversify its portfolio and adapt to the growing shift towards reduced-risk products. As of mid-2024, the company is navigating a challenging regulatory environment, strong competition, and evolving consumer preferences. However, its significant investments in e-cigarettes, nicotine pouches, and other alternative products position BATS well for future growth. This report delves into the company’s financial performance, strategic initiatives, risks, and market outlook.

2. Company Overview

• Company Name: British American Tobacco PLC (LON: BATS)
• Industry: Tobacco and Nicotine Products
• Headquarters: London, United Kingdom
• Key Products: Cigarettes (e.g., Dunhill, Lucky Strike), e-cigarettes (e.g., Vuse), heated tobacco products, and nicotine pouches (e.g., Velo).
• Global Presence: Operating in over 180 countries with a significant market share in regions such as Europe, North America, and Asia.

3. Financial Performance - Revenue and Profitability

• Cash Flow:

Over the last year, operating activities of British American Tobacco p.l.c. generated cash of $10,714,000,000, which is more than the previous year. Cash used in financing activities reached the amount of -$9,314,000,000 last year. Net change in cash is therefore $1,180,000,000.

• Balance Sheet:

The balance sheet is a financial statement presenting the value of assets, liabilities and equity of a company. How has British American Tobacco p.l.c.'s balance sheet done over the years? Its assets were worth $118,716,000,000 last year, which is less than in the previous period. 55% of British American Tobacco p.l.c.’s total assets is currently financed by debt. Its liabilities reached the amount of $65,782,000,000, which means a decrease by -15% compared compared to last year.

• Income Statement:

Income statement is a financial statement that shows how profitable a business was over a given reporting period presenting its revenue, expenses or net income. British American Tobacco p.l.c.'s past years’ income statements indicate that its last revenue has decreased compared to the previous period by 1% to $27,283,000,000. Profit margin reached -53%. Total operating expenses were $37,783,000,000.

4. Industry and Market Analysis

Global Tobacco Industry Trends

• Declining Cigarette Volumes: Globally, cigarette consumption continues to decrease, particularly in developed countries where smoking rates have been in steady decline for decades. However, emerging markets remain a significant revenue source.
• Shift to Reduced-Risk Products: BATS is aligning its portfolio with consumer demand for alternatives to traditional smoking, such as vaping, heated tobacco products, and nicotine pouches. The company is heavily investing in its Vuse e-cigarette brand, which has gained significant market share in several regions.

Competitive Landscape

• Key Competitors: Philip Morris International (PMI), Imperial Brands, Japan Tobacco, and Altria Group.
• Competitive Advantages: BATS benefits from strong brand recognition, especially in Europe and emerging markets. Its diversified portfolio and advanced R&D capabilities allow it to compete effectively in both traditional and reduced-risk product categories.

Regulatory and Health Trends

• Tobacco Regulations: Increasing regulations around tobacco advertising, packaging, and public smoking bans continue to challenge traditional tobacco sales. However, BATS has been able to mitigate some of this risk by pivoting to RRPs.
• Health Advocacy and Anti-Smoking Campaigns: Global anti-smoking campaigns and public health initiatives remain significant hurdles, but BATS' reduced-risk product innovations are seen as part of the solution to the problem of smoking-related diseases.

5. Strategic Initiatives and Growth Opportunities

• Vuse: BATS continues to heavily invest in its Vuse e-cigarette range, which has seen market share growth in the U.S. and other key markets. In 2024, Vuse has expanded its product offerings with new flavors and improved technology.
• Velo: The Velo nicotine pouch brand is performing well, particularly in the U.S. and Europe, with consumers shifting towards smokeless alternatives.

Sustainability and ESG Initiatives

• Environmental Sustainability: BATS has committed to reducing its carbon footprint and adopting more sustainable practices in its manufacturing and supply chains. The company has set a target to become carbon neutral by 2050.
• Social Responsibility: As part of its ESG strategy, BATS is investing in harm-reduction initiatives and ensuring the responsible marketing of its products, particularly in emerging markets.

6. Risk Factors

Regulatory Risks

• Stricter Legislation: Increased regulation on RRPs and traditional tobacco products could reduce the market size, particularly in the U.S. and EU.
• Health Lawsuits: BATS faces ongoing legal challenges related to the health effects of smoking, which could impact its reputation and financial performance.

Market Competition

• Price Wars: With intense competition from PMI, Altria, and local/regional brands, BATS may face pressure on pricing, particularly in the low-cost tobacco segment.

Supply Chain and Manufacturing Risks

• Raw Material Costs: Fluctuations in the prices of tobacco leaves, packaging materials, and nicotine could affect profit margins.
• Supply Chain Disruptions: Ongoing global supply chain challenges, such as semiconductor shortages for vaping devices, may impact product availability.

7. Valuation and Investment Perspective

Stock Performance

• The stock has outperformed its sector average, driven by strong Q1 earnings and optimism around its RRP portfolio.

Valuation Ratios

• P/E Ratio: indicating that the stock is trading at a premium compared to industry peers.
• Dividend Yield: The company offers an attractive dividend yield of 7.91%, in line with its history of maintaining steady payouts to shareholders.

Analyst Consensus

• Rating: Our research analysts have a consensus “Buy” rating for BATS The overall sentiment is positive, driven by growth prospects in RRPs and the company’s stable financial position.

8. Conclusion

British American Tobacco remains a solid investment choice, driven by its strong brand portfolio and successful transition to reduced-risk products. While the company faces regulatory and competitive challenges, its focus on innovation, sustainability, and strategic growth in the nicotine alternatives market places it in a favourable position for long-term growth. Investors should watch for any changes in regulation, particularly in key markets like the U.S. and the EU, but the company’s diversified product offerings and commitment to sustainability provide a promising outlook.

Disclaimer: The information provided by Buttonwoodedge Consulting Ltd is general information or overview. It does not take into account any of your personal objectives, circumstances or needs. Choosing an investment is an important decision. If you do not feel confident making a decision based on the analysis or overview Buttonwoodedge Consulting Ltd has made in our reports, you should consider obtaining personal advice from an authorized adviser. The company accepts no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.