BATS shares dip despite strong trading update

British American Tobacco posted a solid pre-close trading update on Thursday, with growth in its vaping business and “robust” tobacco volumes, despite a looming recession.

Chief executive Jack Bowles says he is “confident” of the company delivering £5 billion in revenues from its new categories and profitability at the division by 2025. “Our transformation is accelerating, driven by our New Categories performance and we are delivering on our full year guidance. Together, this will enable us to further invest in, and accelerate the transformation of, our business,” he told investors.

Another 3.2 million customers were picked up by the vaping business during the first nine months of the year, which now boasts 21 million consumers. Its Vuse, Velo and glo products are establishing leadership in the non-combustibles markets, with Velo gaining 69% of the market in so-called ‘modern oral’.

BATS anticipates ‘resilient’ performance

The tobacco giant expects revenue growth of between 2% and 4% at constant currency rates and mid-single figure adjusted diluted earnings per share growth - before currency headwinds - f around 2%. In general, global tobacco industry volumes are forecast to dip by around 2% due to the recovery from Covid-19 in emerging markets. Smokers tended to smoke more while confined to their homes during the pandemic.

Meanwhile, BATS expects cash conversion rates – the rate at which its profits convert into cash - of over 90% of adjusted profits for the full-year. However, shares in the company fell 3% on Thursday as BATs warned that finance costs would rise to £1.6 billion for the full-year due to interest rate hikes and the strength of the US dollar.

Covid-19 recovery hitting tobacco volumes

The company expects its traditional tobacco business to remain solid despite the cost of living crisis, to deliver a “robust performance” across Asia-Pacific, the Middle East, and Europe and in the Americas and Sub-Saharan Africa thanks to “resilient volumes”. However, in the US trading is under pressure due to the economic downturn and the “normalisation” of customer smoking patterns following the recovery from Covid-19. As such, the company is introducing “commercial plans” to mitigate this across certain brands, channels and states.

To beat input cost inflation, BATS is also chipping away at costs via its three-year Quantum cost saving programme. This should generate over £1.5 billion of savings by the end of 2022 thanks to robust pricing and targeted marketing investment.
Analysts at broker Jefferies Financial set a price target following the trading update of 4,800p.

BATS shares are up 23% this year due to the investor flight to defensive stocks from value stocks. However, with a recession looming and considering the generous dividend yield and growth opportunities within vaping, the shares remain a buy at 3,323p.

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*Based on revenue excluding FX (published financial statements, June 2020).