Company Overview: British American Tobacco PLC (NYSE: BTI) is a British multinational corporation that produces and sells cigarettes, tobacco, and other nicotine-containing products. Dunhill, Kent, Lucky Strike, Pall Mall, Rothmans, Neo, Newport, Camel (in the US) and Natural American Spirit (in the US) are among the company's strategic combustible and Tobacco Heating Products (THP) brands, with over 200 brands in its portfolio, including a growing portfolio of potentially reduced-risk (PRRP), new category products. It has strong market positions in its markets, with leadership in more than 55 of them. BTI has 2.29 billion American Depository Shares (ADS) listed and outstanding (each ADS representing one ordinary share).

BTI Details 

Key Takeaways from H1FY21 (ended June 30, 2021)

• Slight decline in Topline: Revenue declined slightly by 0.78% to GBP 12.18 billion during H1FY21 from GBP 12.27 billion during H1FY20
• Increase in Volumes: BTI reported a 3.1% increase in total cigarettes and THP sticks volume to 324.4 billion in H1FY21
• Minor decline in Net Income: BTI reported a decrease in net income to GBP 3.33 billion during H1FY21 vs. GBP 3.54 billion during H1FY20, representing diluted EPS of GBP 1.42 in H1FY21

Revenue & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• The company was named a sustainability leader for the 20th year in a row on November 15, 2021, and is the only tobacco company to be included in the Dow Jones Sustainability Indices (DJSI) World Index. The World Index represents of top 10% out of the more than 10,000 companies evaluated
• On October 15, 2021, the company announced that it had joined the United Nations-backed Race to Zero initiative, pledging to achieve net-zero emissions by 2050. BAT reduced emissions from its operations by 30.9% in 2020, leading to a total reduction of 37.4% compared to a 2017 baseline.
• On October 13, 2021, BTI received one-of-its-kind marketing authorization, from the US Food and Drug Administration (FDA), for Vuse Solo, an essential product from its US subsidiary Reynolds American Inc., allowing it to sell the product in its original flavor.

Steady Dividends

BTI announced an interim dividend of GBP 2.16 per ordinary share on February 17, 2021, which will be paid in four equal quarterly instalments of GBP 0.54 per ordinary share in May, August, November, and February 2022. The equivalent quarterly dividends are payable to ADS shareholders on February 14, 2022, in US dollars. Over the last five years, the company has regularly paid dividends, as also reflected in the chart below (every D represents a dividend payment):

Consistent Dividends (Data Source: REFINITIV)

Balance Sheet & Liquidity Position

• At Par Cash Balance: BTI's cash balance (including short-term investments) at the end of H1FY21 was GBP 3.35 billion, down 0.92% from GBP 3.38 billion available at FY20 end
• Stable Debt: Total debt was GBP 45.01 billion at the end of H1FY21, higher than GBP 43.97 billion reported as of FY20
• Increase in Trade Receivables: BTI reported an increase in trade and other receivables to GBP 3.93 billion as of H1FY21 from GBP 3.72 billion as of FY20

Key Metrics: In H1FY21, BTI's EBITDA and net margins were 44.5% and 27.3%, vs. the industry median of 22.2% and 7.5%, respectively. In addition, its Debt/Equity ratio as of H1FY21 end was 0.72x vs. 0.70x as of H2FY20.

Profitability and Leverage Profile; Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders (in terms of ownership of ordinary shares listed on the LSE) together form around 34.02% of the total shareholding, while the top 4 constitute the maximum holding. Spring Mountain Investments, Ltd., and BlackRock Institutional Trust Company, N.A. hold the maximum stake in the company at 7.90% and 5.79%, respectively, as also highlighted in the chart below:

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis

• Regulation & Taxation Risk: The tobacco industry is heavily regulated worldwide, with manufacturers obliged to adhere to various regulatory systems. These limitations may limit BTI's ability to promote its products, jeopardizing its operational and financial health. Furthermore, BTI is vulnerable to unanticipated and significant increases in cigarette and nicotine-related taxes in its core countries, which could severely impact its revenues and earnings.
• Exposure to Price Volatility: BTI might not be able to raise prices to cover rising costs without losing sales volume and revenue. In addition, significant increases in raw material, packaging, and employment costs above inflation will harm product margins, resulting in reduced profits and significantly damaging the company's operational health if costs are not compensated for through pricing.
• Exposure to Product Contamination: Contamination of products or the potential of contamination could cost the company a lot of money in product recalls or temporary production halts. Any such contamination could lead to loss of consumer confidence, criminal actions, or regulatory punishments, thus harming its financials.

Outlook

• Looking ahead, BTI forecasts revenue to expand by more than 5% in FY21, owing to robust growth in New Category products and a better global combustible volume outlook, fueled by emerging market recovery.
• BTI expects no rebound in Global Travel Retail (GTR) until FY22, with COVID-19 continuing to negatively impact its associate income from ITC in the H2FY21. In its constant currency guidance, it is also assuming a 2% transactional FX headwind. As a result, it reaffirms its FY21 guidance of diluted EPS growth in the mid-single digits.
• The firm will maintain its 65% dividend payout ratio and dividend growth in GBP terms while investing in the business transformation and deleveraging the balance sheet to reach about 3x adjusted net debt to adjusted EBITDA by year's end.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the past six months, BTI corrected 12.67%. The stock is currently trading below the mid-point of its 52-week range of USD 34.09 to USD 41.14. We have valued the stock using the EV/EBITDA multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a slight premium compared to its peer's average, considering its market dominance, strong profit margins, and global presence. We have taken peers like Philip Morris International Inc. (NYSE: PM) and Altria Group, Inc. (NYSE: MO). Considering the company's market dominance, robust cigarettes and THP sticks volume, steady dividend yield, and current valuation, we give a "Buy" recommendation on the stock at the current price of USD 34.51, down 1.09% as of November 24, 2021, 10:42 AM ET.

BTI Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.  

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