British American Tobacco

British American Tobacco PLC (BATS) is a London, United Kingdom-headquartered multinational tobacco and next-generation products company.  It is one of the world's biggest consumer goods companies and merchandises its products in more than 200 countries worldwide, covering six continents, and was the market leader in more than 55 countries in 2017. Nicandro Durante has been serving as the Chief Executive since March 2011. The four geographical segments are the reportable segments for the company, divided as United States, Europe and North Africa (ENA), Asia-Pacific and Middle East (APME) and Americas and Sub-Saharan Africa (AMSSA).

Recent Development
On 28^th February, the company announced that Tadeu Marroco would succeed Ben Stevens as the Finance Director on 5 August 2019, who will step down as Finance Director and retire from the Board. He has been with the company for 30 years and has held the position for 11 years.

Pre?Close Trading Update (H1 FY 2019)
Shares in British American Tobacco took a beating on Wednesday as the company reported that its share of the cigarette market by volume was down 10 basis points in the year to date, losing cigarette market share for the first time in years. While the company said that it was on track for constant currency revenue growth in the upper half of the long-term guidance range, analysts were disappointed as its guidance for first-half revenue growth from its "new category" products was less than 30 per cent.

Key Financial Highlights (FY 2018, in £m)

(Source: Company Filings)

Revenue increased by 25.2% in FY 2018 to £24,492mas compared to the last year with revenue from the strategic portfolio was up by 49%, while adjusted revenue rising by 3.5% to £24,312m,driven by an increase in total price/mix of 7% and an increase of 3.3% in volume from cigarettes and THP. Profit from operations rose by 45% in 2018 to £9,313m, and the operating margin increased over 500 bps to 38.0%, while the corresponding number on a representative basis increased by 4.0% to £10,347mand adjusted operating margins were higher by 40bps. Basic and diluted EPS declined by 85.6% to 264p and 263.2p respectively, while adjusted diluted EPS increased by 5.2% to 296.7p. Adjusted net debt to adjusted EBITDA was 4.0x, from 5.3x in 2017, and dividend per share increased by 4.0% to 203.0p.

Valuation Methodology
Method:  EV/SalesApproach (NTM)


Share Price Commentary
 
Daily Chart as at June-13-19, before the market closed (Source: Thomson Reuters)
 
On 13^th June 2019, at the time of writing (before the market closed, GMT 11:50 am), BATS shares were trading at GBX 2,916, down by 0.68 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 4,265.00/GBX 2,249.00. The company's stock beta was 1.44, reflecting more volatility as compared to the benchmark index. Total outstanding market capitalisation was around £67.54 billion, with a dividend yield of 6.78%.

Conclusion
The company intend to consolidate its New Category portfolio into fewer brands as it seeks to create a stronger, simpler business and focus on building global brands. While New Category growth in the second half is expected to be driven by a focus on priority markets and new product launches, Strategic Brands continue to grow. The company enjoys huge geographical diversity, helping it to avert political and economic instability in any one region.

Keeping in mind the recent developments, it is also diversifying its business into new products. Based on healthy prospects and supported by valuation done using the above method, we have given a "BUY" recommendation at the current price of GBX 2,916 (as on 13 June 2019) based on 4.58x NTM EV/Sales (approx.) on FY19E Sales (approx.).

Whitbread

Whitbread PLC (WTB) is a Dunstable, United Kingdom-headquartered multinational hotel and restaurant growing, with Premier Inn hotel chain among its portfolio. The company also operates restaurant brands, Brewers Fayre, Bar+Block, Beefeater and Table Table. The company is planning to grow its Premier Inn brand in Germany and will open more than 30 hotels by 2020/21, increasing from just two hotels at the moment. Alison Brittain is the Chief Executive Officer of the group.

Key Financial Highlights (FY 2019, in £m)
 
(Source: Company Filings)

Driven by the contribution of new hotel additions in the current financial year, the company’s reported revenue was up by 2.1 per cent to £2,049 million from £2,007 million in FY2018. The Underlying profit before tax was up by 1.2 per cent to £438 million in FY2019 from £432 million in FY2018, reflecting ongoing efficiency programme and lower underlying net finance costs. Driven by £178 million of non-underlying items, statutory profit before tax decreased by 39.1% to £260 million.The statutory profit for the year (continuing and discontinued) stood at £3,731 million in FY2019 against £436 million in FY2018. The reported basic earnings per share (continuing and discontinued) stood at 2,040.8 pence in FY2019 against 239.7 pence in FY2018. Due to the timing of new capacity, German investment and weaker UK hotel demand, return on capital from continuing operations declined by 30bps to 12.2%, but was still decent. The operating cash flow declined by 7.1 per cent in FY2019 to £814 million from £877 million in FY2018. In FY2019, the company’s capex was up by £2 million to £557 million.

Valuation Methodology
Method:  Price/Book Value Approach (NTM)


Share Price Commentary
 
Daily Chart as at June-13-19, before the market closed (Source: Thomson Reuters)
 
On 13^th June 2019, at the time of writing (before the market closed, GMT 11:55 am), WTB shares were trading at GBX 4,695, down by 0.76 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 5,162.00/GBX 3,869.95. The company's stock beta was 0.90, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was around £8.25 billion, with a dividend yield of 2.11%.

Conclusion
Achieving its five-year target of £150 million in just three years, the company made excellent progress in its efficiency programme. This helped the group to mitigate the effect of inflationary pressure and deliver operating and capital efficiencies. The company is confident of the growth opportunities in the UK and internationally and its profitability has improved significantly with the adoption of tight cost control measures. However, the company saw a decline in business and leisure confidence, leading to weaker domestic hotel demand, which was part of broader ongoing market weakness across both business and leisure, especially in the domestic regions. Though industry cost inflation continues, focus on efficiency helped to cushion the blow resulting from it. The period of political and economic uncertainty in the country due to Brexit has complemented the weakness that increased into March and April.
Based on potential headwinds and supported by valuation done using the above method, we have given a "HOLD" recommendation at the closing price of GBX 4,731 (as on 12^th June 2019) based on 1.66x NTM Price/Book Value (approx.) on FY20E Book value per share (approx.).
 
*All forecasted figures and peers have been taken from Thomson Reuters.
*The Buy recommendation is also valid at the current price as on June-13-19.

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