British American Tobacco Plc – Strong business performance despite Covid-19 pandemic.

British American Tobacco Plc (LON: BATS) is the FTSE 100 listed global holding Company, which deals in tobacco and nicotine products.

Investment Highlights - British American Tobacco Plc – Hold at GBX 2,947.50.

• The Company has delivered strong revenue growth from 2016 to 2019 at a CAGR of 20.6%.
• The Company is expecting its adjusted earning per share and revenue to grow by a mid-single-digit and low-single-digit, respectively, at constant currency during FY20 despite facing the challenges thrown by Covid-19 pandemic.
• British American Tobacco is the only tobacco Company to be included in Dow Jones Sustainability Indices (DJSI) in November 2020 for the 19^th consecutive year.
• From a technical standpoint, the Company is trading above its 20-day simple moving average of GBX 2,767.4, indicating upside potential of the stock.

Key Risks

• The Company is exposed to several operational risks associated with geological and weather conditions.
• The Company has financial risk due to interest rate fluctuations.
• The ongoing challenges of Covid-19 pandemic and Brexit may increase its operating cost and hamper business activities.

Pre-Close Period Trading Update as on 09 December 2020

• The adjusted revenue growth at constant currency is expected to remain at the high end ranging from 1% to 3% during FY20 while expected revenue headwinds due to Covid-19 was reduced to 2.5% from the previous forecast of 3%.
• The Company is expecting its adjusted earning per share to grow by mid single-digit at constant currency.
• The Company has anticipated a dividend payout ratio of 65% of adjusted diluted EPS well supported by a strong liquidity position.
• The Company is aiming to deleverage its balance sheet by bringing down net debt/adjusted EBITDA to around 3x by the end of 2021.

Recent News

On 07 December 2020, the Company has updated regarding the appointment of  Darrell Thomas as an independent Non-Executive Director effective from same day.

Financial Highlights (for six months ended on 30 June 2020 as on 31 July 2020)

(Source: Company result) 

• The revenue of the Company was surged by 0.8% from £12.27 billion for H1 FY20 ended on 30 June 2020.
• The operating margin of the Company was increased by 550 basis point and reached 41.5% during H1 FY20.
• With regards to its financial position, the net debt of the Company stood at £50.46 billion as of 30 June 2020.
• The Group has generated net cash from operations of £3.48 billion during the period.
• The cash conversion ratio of the Company stood at 68% as of 30 June 2020.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

The adjusted revenue growth at constant currency for FY20 is expected to remain at the high end of 1%-3% range while expected revenue headwinds due to Covid-19 was reduced to 2.5% from the previous forecast of 3%. The Company has set a medium-term rating target of BBB+/Baa1, with a current rating of BBB+/Baa2. The Company has delivered a resilient financial performance in US Cigerrate business with year-to-date growth of 40 basis points. The Company was included in the ‘A-List’ by the Carbon Disclosure Project for the consecutive second year during November 2020.  

On the technical front, the Company is trading above its 20-day simple moving average of GBX 2,767.4, indicating upside potential of the stock. The stock made a 52-week high and low of GBX 3,507.00 and GBX 2,362.50, respectively.

Based on its reasonable financial forecast and support from the valuation method, as shown above, we have given the "Hold" stance on British American Tobacco Plc at the current market price of GBX 2,947.50 (as on 10 December 2020, before the market close at 08:10 AM GMT).

Tesco Plc – £8.2 billion sale of its Thailand and Malaysia business unit.

Tesco Plc (LON: TSCO) is the FTSE 100 listed Company, which is the leading UK retailer serving millions of customers through its stores and online space as well.

The Company will report its Q3 FY21 and Christmas Trading statement on 14 January 2021.

Investment Highlights - Tesco Plc – Hold at GBX 228.60.

• The Company will pay £5.0 billion of net proceeds from the sale of its Thailand and Malaysia business as a special dividend after taking the shareholder approval on 11 February 2020.
• On the valuation front, Price/Earnings, EV/Sales and Price/Book value of the Company are lower than the corresponding average multiples of the Consumer Non-cyclicals industry indicating that the Company is slightly undervalued.
• The statutory revenue and Profit before tax of the Company have shown an increasing trend during H1 FY21 ended on 29 August 2020.
• The Company has doubled its online delivery capacity during H1 FY21 and reached 1.5 million slots per week.
• From a technical standpoint, the Company is trading above its 50-day simple moving average of GBX 219.60, indicating upside potential of the stock.

Key Risks

• The Company is exposed to cybersecurity risk as it caters to online business.
• Since the Company is operating in multiple geographies, it is exposed to currency risk due to foreign exchange rate fluctuations.
• There is a risk of more severe lockdowns imposed by the government in the near future.

Recent News

On 09 December 2020, the Company has updated regarding the satisfaction of all conditions required for the sale of its business in Thailand and Malaysia. The disposal is expected to be completed on or around 18 December 2020.

On 08 December 2020, the Company has updated regarding the appointment of  Karen Whitworth as an independent Non-Executive Director effective from 18^th June 2021.

On 02 December 2020, the Company has updated that it has decided to repay business rates relief of £585 million.

Financial Highlights (for 26 weeks ended on 29 August 2020 as on 07 October 2020)

(Source: Company result) 

• The Company has delivered 6.6% growth in revenues to £26.7 billion driven by its strong performance in the UK & ROI.
• The operating profit has declined by 15.6% to £1.04 billion for the 26 weeks period ended on 29 August 2020.
• With regards to its financial position, the Company has managed to reduce its net debt by 0.4% from £12.6 billion during H1 FY20 to £12.5 billion during H1 FY21.
• The Company has declared an interim dividend of 3.20 pence per ordinary share, which is 35% of prior year full-year dividend to be paid on 27 November 2020.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company has updated regarding the satisfaction of all conditions required for the sale of its business in Thailand and Malaysia for £8.2 billion, and disposal will be completed by 18 December 2020. The sale of Polish business to Salling Group A/S was agreed in June for net cash proceeds of £165 million is expected to be completed by Spring 2021. The Company has adapted well towards the major shift in consumer buying patterns in the UK. In terms of customer satisfaction, the Brand net promoter score went up by 2 points and the Company was awarded as ‘Brand of the Year’ in Marketing week masters award. Imran Nawaz will join the Tesco board as a CFO in April 2021. The Company is all set to boost its business during the festive period of Christmas.

On the technical front, the Company is trading above its 50-day simple moving average of GBX 219.60, indicating upside potential of the stock. The stock made a 52-week low and high of GBX 108.00 and GBX 318.55, respectively.

Based on the strong sales anticipated during the festive season and support from the valuation method shown above, we have given the "Hold" stance on Tesco Plc at the current market price of GBX 228.60 (as on 10 December 2020, before the market close at 08:10 AM GMT).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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