Dunhill-to-Lucky Strike brand owner British American Tobacco (BATS) has raised top line guidance for 2020 to the upper end of previous expectations on the back of an improved volume outlook.
Performing strongly despite the challenges presented by the pandemic, ‘BAT’ upgraded constant currency adjusted revenue growth guidance to the high end of its previous 1%-to-3% forecast range for 2020, though the shares softened 0.5% to £28.86 early on.
WHY BAT’S BEEN WEATHERING THE STORM
The coronavirus pandemic has had less of an impact on demand for cigarettes than originally feared. Lockdowns and restrictions on international travel have given people more time, and in many instances more money, to smoke, enabling the tobacco industry to weather the pandemic rather well.
In today’s trading update, the company pointed to an expected 5% forecast decline in global industry cigarette and Tobacco Heating Products (THP) volume.
This is an improvement on the previously estimated 7% decline, reflecting the earlier than anticipated lifting of a tobacco sales ban in South Africa, continued resilience in developed market volume and a recent improvement in emerging market volumes.
Furthermore, the US industry is now expected to be broadly flat in 2020, versus a previous estimate for a 2.5% decline. This is significant because the US is BAT’s biggest market.
British American, whose reduced risk products include the fastest growing international vapour brand Vuse, also reiterated its mid-single digit annual adjusted earnings per share forecast.
This confidence reflects increasing second half revenue growth from less harmful new categories - THP, Vapour and Modern Oral - combined with the continued deleveraging of the FTSE 100 behemoth’s balance sheet.
CONFIDENT AND COMMITTED
‘Reducing the health impact of our business through providing a range of enjoyable and less risky products is the greatest contribution we can make to society,’ commented chief executive Jack Bowles, while keeping income seekers on side by maintaining BAT’s dividend pay-out ratio of 65% of earnings per share.
‘We continue to be clear that combustible cigarettes pose serious health risks, and the only way to avoid these risks is not to start or to quit,’ continued Bowles.
‘BAT encourages those who would otherwise continue to smoke to switch completely to scientifically substantiated reduced risk alternatives. We are growing our New Category business as fast as possible and we are proud to now have around 13 million non-combustible product consumers.’
Bowles insisted ‘we are confident about the future for BAT’ and are ‘committed to our 2025 New Category revenue ambition of £5 billion’.
