British American Tobacco PLC

British American Tobacco PLC (BATS) is a London, United Kingdom-headquartered multinational tobacco and next-generation products company.  The company 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 50 countries. 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).

On 11^th December 2019, the company will announce the pre-closing trading update.

Financial Highlights (H1 FY2019, £million)

(Source: Interim Reports, Company Website)

The company’s revenue increased by 4.6 per cent in H1 FY19 to £12,170 million as compared to the corresponding period of the last year with revenue from the strategic portfolio was up by 8.7 per cent, while adjusted revenue rose by 5.3 per cent to £12,139 million, while on constant rates, adjusted revenue increased by 4.1 per cent, due to price/mix and increase in new categories.

Profit from operations declined by 1.3 per cent in H1 FY19 to £4,380 million, and the operating margin declined over 210 bps, while the corresponding number on a representative basis increased by 8.1 per cent to £5,209 million (adjusted profit) and adjusted operating margins were higher by 110bps. Adjusted diluted EPS rose by 8.8 per cent to 149.3 pence.

In 2019, adjusted net debt to EBITDA is projected to decline by around 0.4x from the same period in 2018. The next quarterly dividend per share of 50.75 pence will be paid on August 2019, as part of the earlier announced dividend per share of 203 pence, which is payable in four equal instalments.

Share Price Performance

Daily Chart as at 2nd August 2019, before the market closed (Source: Thomson Reuters)

On 2nd August 2019, at the time of writing (before the market close, GMT 9:44 AM), British American Tobacco PLC shares were hovering at GBX 3,124 and decreased by 0.998 per cent as compared with the previous day closing price. Stock's 52 weeks High is GBX 4,240 and 52-weeks Low is GBX 2,249. The group’s stock beta stood at 1.40, reflecting higher volatility as compared to the benchmark index.

Conclusion
The tobacco industry is progressively seeking to grow their share of the nascent e-cigarette market, which contains heat-not-burn and vaping products, in an attempt to counter the drop-in cigarette consumption in the west. The group plans to accelerate the investment in its e-cigarette to catch up with the competitors and offset a decrease in sales at core brands such as Dunhill and Lucky Strike.

The company said it had significant additional investment planned for its new product portfolio and projected strong growth from its modern oral category, i.e. small pouches that allow nicotine to be taken in through the gums.

The group continue to deliver with adjusted profit from operations and adjusted revenue in line with the guidance, due to a continued robust financial performance in combustibles. The company said that it is expected that the growth rate for new products to accelerate over the next six months.  The group is on track for its guidance range of 30 per cent to 50 per cent for annual revenue progress from new categories, on a constant currency basis.

Based on the above rationale and fundamental performance, we have given a “Hold” recommendation at the closing price of GBX 3,155.50 (as on 1^st August 2019).
 

International Consolidated Airlines Group SA
 

International Consolidated Airlines Group SA (IAG) is among the world’s largest airline group headquartered in London, United Kingdom. The group has 573 aircraft carrying around 113 million passengers to 268 destinations each year. IAG is a market leader in three European countries, i.e. Ireland, UK and Spain which enables them to gain the majority of share in the aviation market.

Financial Highlights (H1 FY2019, €million)

(Source: Interim Report, Company Website)

In H1 FY19, the company reported total statutory revenue of €12,089 million against €11,206 million for the same period of the last year. There was an increase of 7.88 per cent in revenue, due to the steady growth of both passenger revenue and other revenue. The company’s reported operating profit (before exceptional items) declined by 1.79 per cent in comparison with the last year data mainly due to an increase in the operating and administrative expenses for the period.

Despite high fuel prices, the group reported a second quarter pre-tax profit of €921 million in Q2 FY19 as compared with €770 million the previous year same period data. The company made an operating profit of €873 million before exceptional items as compared with €868 million for the six months to June 30.

Statutory Operating profit (after exceptional items) declined from €1,735 million in H1 FY2018 to €1,095 million in H1 FY2019. The company’s reported pre-tax profit stood at €1,007 million in H1 FY2019against €1,655 million in H1 FY2018. The company’s profit after tax (before exceptional items) decreased by 0.4 per cent to €806 million in H1 FY2019 against €803 million in H1 FY2018. The company’s statutory profit after tax and exceptional items stood €806 million in H1 FY2019 against €1,408 million in H1 FY2018. The company’s reported basic EPS stood at €40.6 cents in H1 FY2019 versus €68.3 cents in H1 FY2018.

Share Price Performance
 
Daily Chart as at 2nd August 2019, before the market closed (Source: Thomson Reuters)

On 2nd August 2019, at the time of writing (before the market close, GMT 11:30 AM), International Consolidated Airlines Group SA shares were hovering at GBX 436.10 and increased by 5.47 per cent as compared with the previous day closing price. Stock's 52 weeks High is GBX 718.34 and 52-weeks Low is GBX 413.50. The group’s stock beta stood at 0.67, reflecting lower volatility from the benchmark index.

Valuation Methodology

Peers: Royal Mail PLC, Air China Ltd, Easyjet PLC, Wizz Air Holdings PLC, BBA Aviation PLC, and Stobart group Ltd.

Conclusion
British Airways' webpage disclosed the theft of customer data on September 6th,2018 and October 25th, 2018. The company had been issued with the penalty notice on 8th July 2019 under the UK Data Protection Act.

The group reported 20 per cent in profit for the three months to June 30, 2019. The company has shown good financial performance as compared to the last year. There has been a significant increase in the revenue and the earnings of the company, reflecting favourable top line and bottom-line margins. The company has increased capacity in all the airlines and regions excluding Asia-Pacific. Political uncertainty, fuel price volatility are the major risks that can impact the performance of the business group. The company’s operations will be impacted by the uncertainty created over Brexit.

In FY2019, the company expects operating profit (before exceptional items) to be in line with proforma of 2018 on current fuel prices and exchange rates. Passenger unit revenue is projected to be flat at constant currency and the non-fuel unit cost is projected to improve at constant currency. On a constant currency basis, the company assume passenger unit revenue to progress for the rest of the year 2019.
Based on the decent prospects which are supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 413.50 (as on 1^st August 2019) with single-digit upside potential based 1.35x NTM Price/Book (approx.) on FY19E book value per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.
*Currency exchange rate taken for 1 EUR = 0.916635 GBP.
*The Buy recommendation is also valid at the current price as on August-02-19.

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