London-listed cigarettes colossus British American Tobacco (BATS) has trimmed its full year sales target for its less harmful next generation products (NGPs), blaming a flat Japanese market and a US product recall for the setback.

Shares in the Dunhill, Lucky Strike and Pall Mall cigarettes maker cheapen another 20.5p to £33.11, extending their dire 2018 showing, on the sombre news.

Sentiment towards tobacco stocks remains poor, reflecting fears over regulation, declining cigarette volumes and not helped by rising government bond yields, which lessen the comparative attractions of the dividend yields on offer from these cash-generative income-yielding stalwarts.

In an update ahead of analyst and investor meetings over the coming weeks, the world’s second biggest tobacco company says it continues to deliver good market share gains. This is in an industry where volume is set to be down roughly 3.5% this year as more people quit smoking and choose to pursue healthier lifestyles.

TRIMMING A KEY TARGET

However, BAT now expects revenue from key ‘Potentially Reduced Risk Products’ – specifically the next generation Tobacco Heating Products (THP) and vapour categories - to reach £900m this year.

That is significantly down from a previous target of £1bn, largely due to a reduction in planned year-end stocks in Japan, where the THP market remains flat, and the effect of a recall in the US of BAT’s Vuse Vibe vaping product.

While the Japanese THP category isn’t showing any growth, BAT’s glo product has increased its share from 3.3% at the start of the year to 4.4%.

Moreover, though BAT has pruned back its cigarette alternatives target, its global vapour business is expected to deliver double digit volume and constant currency revenue growth in 2018, with Vuse continuing to perform well across the pond, driven by the launch of a ‘pod-mod product’, Alto, and the reintroduction of Vibe.

CAUTIONING ON CURRENCY

BAT also cautions that full year adjusted earnings per share growth will be impacted by currency fluctuations, a headwind of ‘around 7%’ flagged assuming exchange rates remain unchanged for the rest of the year.

Nevertheless, BAT boss Nicandro Durante, who’ll hand over the CEO baton to internal candidate Jack Bowles next April, insists he is ‘delighted with the progress we are making with our Potentially Reduced Risk Products business and we have a great pipeline of new product launches over the coming months which will build on this success.

'At the same time, our combustible tobacco business continues to perform well. We remain on track for a strong performance in 2018.'


Issue Date: 16 Oct 2018