British American Tobacco PLC

British American Tobacco PLC (BATS) is a FTSE-100 listed Consumer Goods Company, which serves consumers with tobacco and nicotine products around the world.

On 11 February 2022, BATS expects to announce its preliminary results for FY21.

Rationale for Valuation – HOLD at GBX 2,726.00

• BATS liquidity profile remained robust, while the Company is deleveraging the balance sheet to reach ~3x adjusted net debt to adjusted EBITDA by the FY21 end. Moreover, BATS is a highly cash generative business which is targeting an excellent cash conversion and dividend pay-out ratio in FY21.
• It continued to maintain investment-grade credit ratings with ratings from S&P/Moody’s at BBB+ (stable outlook)/Baa2 (stable outlook), respectively.
• From a technical standpoint, 20-day EMA (GBX 2,709.30) is sustaining below the current market price, reflecting the bullish price momentum.
• On a forward 12-month basis, valuation metrics – EV/EBITDA, Price/Earnings, Price/Cash Flow, and Price/Book are quite undervalued against the Consumer Non-Cyclicals industry.

Key Risks

• The resurgence in the Covid-19 delta variant can have a lasting impact on suppliers, operations, and customers.
• The regulatory restrictions regarding tobacco and new categories can impact its growth strategy.

Financial Highlights (for the six months ended 30 June 2021, as of 28 July 2021)

 (Source: Company Website)

• BATS reports strong interim results, as new categories revenues jumped 50% year-on-year to £942 million in H1 FY21.
• Similarly, vapour revenue was also up by 59% year-on-year. The Group added 2.6 million consumers to its non-combustible product in H1 FY21.
• The Group has also increased its savings target to £1.5 billion by FY22.
• The adjusted profit from operations was surged by 5.4% year-on-year in H1 FY21, including transactional FX impact of 2%.

Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion 

BATS anticipating cash flow conversion of over 90% in FY21, while the adjusted Net debt/Adjusted EBITDA is expected to be around three times. The Group is committed to delivering a 65% dividend payout ratio and growth in sterling terms. The market is gaining momentum, and the market growth is fueled by the rising consumer disposable income, new product launches, availability of superior-quality products, and increasing consumption among females and students. Furthermore, it is targeting carbon neutrality by 2030 and accelerating existing environmental targets to 2025. The stock made a 52-week High and Low of GBX 2,961.50 and GBX 2,422.50, respectively.

Based on the new category acceleration, strong cashflow conversion, commitment to dividend pay-out ratio, improving market trends, and support from the valuation as done using the above method, we have given a “HOLD” recommendation on British American Tobacco PLC at the current market price of GBX 2,726.00 (as on 7 September 2021, 7:50 AM GMT).

BP PLC

FTSE 100 listed BP PLC (LON: BP.) is an integrated energy business with major operations in North and South America, Europe, Asia, Australasia, and Africa. It operates with around 79,100 employees in 79 countries.

The second-quarter dividend will be paid on 24 September 2021 to shareholders on the register on 13 August 2021.

Investment Rationale – HOLD at GBX 298.38

• The recent weakening of US Dollar and slowdown in job creation in August 2021, and damage caused to the supply by the Hurricane to the Gulf Coast infrastructure can support the oil prices.
• BP raised Q2 FY21 dividend by 4% and commenced share buyback of US$1.4 billion. In FY21, BP intends to distribute 60% of surplus cash flow through share buybacks.
• BP PLC reported strong financial results and cash flow delivery in H1 FY21, while it has also reduced its net debt and maintained a strong investment grade credit rating. Therefore, it has grown dividend and executing buybacks.
• From a technical standpoint, 20-day EMA (GBX 297.80) is sustaining below the current market price, reflecting the bullish price momentum.
• On a forward 12-month basis, valuation metrics – EV/Sales, Price/Cash Flow, and Price/Book are quite undervalued against the Energy industry.

Risk Assessments

• Saudi Arabia recently announced deep cuts in its prices to Asian markets, which can lead to a fall in crude price in the short-term.
• The resurgence in Covid-19 cases raising fears of an economic slowdown. Therefore, commodity prices and product demand will remain uncertain in the short-term period.
• Further, economic instability and currency fluctuations can also impact business performance.

Recent News

Share Repurchases: On 3 August 2021, BP commenced a share buyback programme to reduce its issued share capital of the Company. It intends to distribute 60% of surplus cash flow in FY21.

Financial Highlights (for the six months ended 30 June 2021, as on 03 August 2021)

 (Source: Company Website)

• On the back of improved trading conditions, the Group report strong results in H1 FY21 and continued to reduce its net debt.
• As of 30 June 2021, net debt reduced to US$32.7 billion, following the generation of surplus cash flow of US$2.4 billion in H1 FY21.
• The Group affirmed intentions to commence buyback of US$1.4 billion from surplus cash flows generated in H1 FY21.
• The quarterly dividend increased by 4% to 5.46 cents per ordinary share in Q2 FY21.

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion

In H1 FY21, BP reported strong results, reduced net debt further, grew dividend, and made strategic progress. The Group has also commenced with share repurchased alongside resilient dividend policy. Moreover, the recovery in oil demand with lockdown easing and accelerated vaccine rollouts shall support the growth in FY21. Furthermore, OPEC+ behavior shall play a critical role in market rebalancing and oil price recovery. In Q3 FY21, upstream production is projected to be higher than Q2 FY21, while realized refining margins are also expects to improve moderately. The stock made a 52-week High and Low of GBX 508.70 and GBX 188.52, respectively.

Based on the strong operating results, accelerated disinvestments, disciplined strategic progress, strong cash flow, reduced net debt, supported by the valuation conducted above, we have given a “HOLD” recommendation on BP PLC at the current market price of GBX 298.38 (as on 7 September 2021, as on 7:25 AM GMT).  

*All forecasted figures and Industry Information have been taken from REFINITIV.

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

*The reference data in this report has been partly sourced from REFINITIV.

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