British American Tobacco PLC

FTSE 100 listed British American Tobacco Plc (LON: BATS) is a London based multi-category consumer good company with the core business focus around tobacco.

2020 First Half Pre?Close Trading Update (as on 9^th June 2020)
Despite the challenging backdrop, the Group is performing well and remain committed to its 65 per cent dividend payout policy. The Group said it continues to see the strong volume and good pricing, with good share growth across all its three categories ? tobacco heating, vapour and modern oral. The Company expects tobacco heating product (THP) volume and global industry cigarette to be down approximately 7 per cent in 2020, but BAT FY cigarette volume to be ahead of the industry. In the year to date, the cigarette volume surged by 50bps, with its value share up by 20bps. As a result, the tobacco firm is guiding for FY20 constant currency adjusted revenue growth between 1% to 3%. While it is also guiding a mid-single-digit growth in adjusted diluted EPS at a constant currency basis.

Share Price Performance

1-Year Chart as at June-12-2020, after the market close (Source: Refinitiv, Thomson Reuters)

On 12^th June 2020, British American Tobacco PLC’s shares closed at GBX 3,000 and were down by 0.02 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 3,507.00/GBX 2,362.50.

Momentum oscillator RSI 14 days on the chart is reflecting an oversold position for the stock and upside bump can be triggered in the near term.

Valuation Metrics

(Source: London Stock Exchange)

As on 29^th May 2020, the Price/Earnings multiple of the BATS was 12.9x, which was lower as compared with the Tobacco industry of 13.1x, reflecting that the Company is trading at a lower multiple as compared to its peers.

Conclusion
The Group has shown a good start to the year, with value share growth and robust volume. In developed markets, the Group witnessed strong results, with continued good pricing. There has been a little evidence of down trend in the developed markets, with a particularly robust performance in the US. In emerging markets, BATS noted that the COVID-19 pandemic had a more pronounced negative effect. In New Categories, the business is on-track, with recent launches in THP showing encouraging early results and share growth in all its three categories. The firm said it plans to continue its investment in New Categories business and is still targeting GBP 5 billion revenue but has extended the target date to 2025 from 2023-24 previously. The Company is committed to Building a Better Tomorrow, which includes the potential vaccine for COVID?19, under development at the US bio?tech subsidiary (Kentucky BioProcessing (KBP)). This is poised to move to clinical trials and has proven its ability to create an immune retort in pre?clinical testing.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance at the closing price of GBX 3,000 (as on 12th June 2020) and will recommend fresh buying at the right time.

Imperial Brands PLC – Operating with Strong Cash Position, DespiteElevated Global Volatility

Imperial Brands PLC (LON: IMB) is a FTSE 100 listed fast-moving consumer business, with operational interest in a variety of fine cut and smokeless tobaccos, cigarettes, papers and cigars.

On 17^th November 2020, the Company will release its Full Year Results.

Recent News
On 12^th June 2020, the Company announced that Karen Witts has decided to step down as a Non-executive Director of the Company and as Chair of the Audit Committee.

Financial Highlights (for the six months ended 31st March 2020)
 
(Source: Interim Reports, Company Website)

Overall results were decent, with an improved share performance, stronger in-market execution, progress towards stronger business, and robust cash position.Tobacco net revenue stood at GBP 3,509 million in H1 FY20, which remained nearly flat against the corresponding period of the last year. The adjusted operating profit for the financial year 2020 reduced by 9.3 per cent (down 7.7% at constant currency) to GBP 1,469 million as compared with the same period of the last year (H1 FY19: £1,620 million). The Group witnessed a growth of 1.3 per cent in Tobacco gross profit.

Share Price Performance

1-Year Chart as at June-12-2020, after the market close (Source: Refinitiv, Thomson Reuters)

On 12^th June 2020, Imperial Brands PLC’s shares closed at GBX 1,485.50 and were down by 0.64 per cent versus the previous day closing price. Stock 52 weeks High and Low are GBX 2,256.00/GBX 1,258.20.

Momentum oscillator RSI 14 days on the chart is reflecting an oversold position for the stock and upside bump can be triggered in the near term.

Valuation Methodology


Valuation Metrics

(Source: LSE)

As on 29^th May 2020, the Price to Sales multiple of the Imperial Brands PLC was 0.9x and the same multiple was lower as compared with the Tobacco industry. It is reflecting that the Company is trading at a lower multiple as compared to its peers.

Conclusion
The Board believes that the arrival of a new Chief Executive will add great value to the Group’s performance and also increase the share price. The Company abridged its dividend and said cutting debt was its main priority as tobacco sales were flat and vaping revenues have been reduced in the past half-year amid elevated global volatility created by COVID-19. The Group witnessed a strength in the balance sheet, with the rebased dividend to accelerate debt reduction; renewed revolving credit facility & further committed facilities.

During the H1 FY2020, there was a small impact on trading from COVID-19, but the Group expects this to be more pronounced in the second half of 2020, driven by changes in the consumption patterns and continued pressures on the duty-free & travel retail business. The company’s prospects look good, and it could be an attractive opportunity to invest in the long term. However, the new revolving credit facility will help the Company to operate effectively in the uncertain market environment.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Buy” recommendation at the closing market price of GBX 1,485.50 (as on 12^th June 2020) with high single-digit upside potential based on 3x NTM EV/Sales (approx.) on FY20E Sales (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
* The “Buy” recommendation is valid for the current price as covered in the report as on 15th June 2020.

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