British American Tobacco Plc (BATS) is a London based cigarettes manufacturer and distributor, founded in 1902. The company serves millions of adult customers globally and is a leading multi-category provider of tobacco and nicotine products. Their key brands are Dunhill, Kent, Vype, Epok, Lucky Strike, Pall Mall, Vuse, Granit, Rothmans, Newport, Glo, Mocca, Camel Spirit, Chic, Grizzly, Camel Snus, Kodiak, Kool, Peter Stuyvesant, Carven A and State Express 555. 

Financial Highlights (FY2018, £million)

(Source: Annual Report, Company Website)

British American Tobacco Plc's revenue grew by 25.2 per cent, led by volume growth from cigarettes and THP by 3.3 per cent, due to the inclusion of RAI as a wholly owned subsidiary of British American Tobacco, and pricing as well. Profit from operations stood at £9,313 million, up by 45.2 per cent against its FY17 profit from the operation. For the financial year 2018, basic and diluted earnings per share plunged by around 86 per cent. In FY18, adjusted diluted earnings per share improved by 11.8 per cent on a constant currency basis on account of growth in operating performance and lower effective tax rates. Dividend per share stood at GBX 203 for FY18, up by 4 per cent against FY17 dividend per share.

Share Price Performance

Daily Chart as at May-07-19, after the market closed (Source: Thomson Reuters)

On 7^th May 2019, BATS shares closed at GBX 2,873.50, down by 0.828 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 4,265/GBX 2,336.50. The company’s stock beta was 1.41, reflecting higher volatility as compared to the benchmark index.

Recent News
On 29^th April 2019,British American Tobacco Plc, which makes Lucky Strike and Dunhill cigarettes, has formed specific social media networks for its flagship product, Vype. The company’s Instagram and Twitter feeds show fashion-campaign style images of the products being used by millennials, as well as featuring celebrities such as singer Lily Allen and street artist Pegasus. BAT’s revenue from vaping products rose from £168m in 2017 to £318m last year.

Valuation Methodology

*All forecasted figures and peers have been taken from Thomson Reuters.

Growth Perspective
The company stands to benefit from the positive outlook for the global tobacco industry.The addictive nature of the product, young smoking population, affordable prices, and increasing disposable income are creating the demand for innovation, increasing the availability of premium products and the belief of people that tobacco is a stress buster is fuelling the demand for growth. Product innovations will help the company to gain an advantage over its peers and build brand equity, besides driving overall sales growth. Launch of new products could provide an opportunity for the company to meet the changing tastes of the consumer and serve diverse markets more efficiently.

Conclusion
BAT has adequate resources to meet its financial and operating requirements without any disruption for another three years. Growing brand penetration and increasing smoker’s headcount will drive the future growth of the company. British American Tobacco Plc has a strong business model and significant market share within the tobacco industry across the world, with strong fundamentals. However, the final announcement of the use of e-cigarette and epilepsy is yet to come.Based on above factors and supported by valuation done using the above method, we have given a “Buy” recommendation at the closing price of GBX 2,873.50 (as on 7th May 2019) with single-digit upside potential based on 4.60x NTM EV/Sales multiple (approx.) on FY19E sales (approx.).

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