Global cigarette giant British American Tobacco (BATS) rose 1.9% to £27.06 on Friday despite missing first-half earnings estimates, after the Dunhill-to-Lucky Strike brand owner said it had sold more higher-priced cigarettes and seen strong demand for vaping products in its biggest market, the US.

‘BAT’ insisted consumption in the US was ‘resilient’, while also maintaining guidance for 2020 revenue growth of between 1%-to-3% and mid-single digit earnings growth, in line with a downgrade coughed up in June.

RESILIENT SHOWING STATESIDE

BAT’s shares have tumbled since a disappointing pre-close update last month, when it cut annual profit and revenue forecasts blaming the impact of prolonged lockdowns in South Africa and Mexico as well as weaker sales in countries including Bangladesh and Vietnam.

Yet the shares wafted higher today on evidence the US market is performing strongly. US industry volume is expected to be down around 2.5% in 2020, noted BAT, better than the 4% previously anticipated, driven by ‘the continued resilience of consumer demand and higher trade stock levels being maintained as a result of COVID-19’.

For the six months to June, the Kent-to-Pall Mall maker’s pre-tax profit climbed to £4.59 billion from £3.86 billion as revenue edged 0.9% higher to £12.2 billion.

Cash from operations grew 52% to almost £3.5 billion and chief executive Jack Bowles and the board reiterated their commitment to a 65% dividend payout ratio, keeping income seekers on side.

EMERGING MARKETS DRAG

Emerging markets dragged down BAT’s performance however, with the results hindered by government-mandated factory closures, supply chain disruptions and bans across South Africa, Mexico, Argentina, Bangladesh, Vietnam and Malaysia.

These challenges have broadly eased except for South Africa, where BAT is challenging the sales ban in the courts.

While total cigarette volume declined, BAT generated higher sales from reduced-risk new categories.

Revenues from vapour and modern oral products rose in the half, while Tobacco Heating Product (THP) volume grew 9.1% thanks to higher volume in Russia, Ukraine, Spain and Italy. THP revenue declined 8.7% to £286 million though, largely due to the impact of excise harmonisation in Japan.

WHY LIBERUM IS BULLISH

With a ‘buy’ rating and £31.70 price target, Liberum Capital commented: ‘Despite the miss, BAT is in an elite group of resilient businesses which have been able to grow sales, earnings and cash flow during the challenging COVID-19 period.

‘There is no change to previously revised guidance and it maintained the medium-term post COVID-19 guidance of 3-5% constant currency, adjusted revenue growth and high-single figure constant currency adjusted diluted earnings per share growth.’

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Issue Date: 31 Jul 2020