ADVANCED TECHNICAL ANALYSIS – TOBACCO – BRITISH AMERICAN TOBACCO

INDUSTRY DRIVERS

The global e-cigarette market is expected to expand to over $50 billion by 2025, (this equates to an estimated CAGR of over 20% for the period 2015-2025). Drivers include increased regulatory and policy changes within more mature markets, as well as the growth of new product offerings.

To date disposable e-cigarettes have dominated the market, but new products such as rechargeable e-cigarettes and personal vaporizers are starting to see increased market share.

The U.S. market is still amongst the largest by revenue, but China is catching up fast, and is expected to be the second largest region by 2025.

EDUCATIONAL STOCK – BRITISH AMERICAN TOBACCO (BATS LN) – www.bat.com

Management recognise the importance of the E-Cigarette market and 2015 saw further market share growth in the Co.’s Vype brand. The UK saw three new product launches and a number of new flavours, with Vype also being launched across Germany, France, Poland, Italy and Columbia. BATS also launched its first Tobacco Heating Product (the glo iFUse) in Romania which met with very positive levels of customer acceptance.

BATS also benefits from a number of leading global market positions in traditional tobacco (a footprint in over 200 regions) and sells a product that enjoys significant pricing power as a result of a resilient demand backdrop.

The Co.’s premium products have continued to garner market share, despite the economic slowdown in developing economies (an estimated 80% of smokers live in middle and lower-income countries).

Cost cutting initiatives are progressing well within the Co., which is offsetting FX pressures.  

British American is also relatively defensive (in today’s more uncertain stock-market), generates significant amounts of cash, and offers a healthy yield, (which has increased each year since 1999) and also looks attractive from a number of valuation metrics.

Reynolds, (BATS is a 42% holder) saw healthy Q4 revenue growth of 43% on the back of a strong domestic cigarette market with management hiking its quarterly dividend by 17%.

DIVIDEND & PEER VALUATION SNAPSHOT

BATS yields a healthy 3.73% and trades at a 5% peer discount on a blended forward P/E basis.  On a standalone basis the Co. also scores a positive Altman-Z read of 3.26 (a read > 3 indicates relatively solid underlying Co. financials). British American also meets the (BBG) Quality stock ranking, with a read of 196.

TECHNICAL CHART READING/ RELATIVE PEER PERFORMANCE/ ADVANCED CANDLESTICK ANALYSIS/ RISK

The share recently found support just above the 3900p level, (and has underperformed versus its US Tobacco peers (DWCTOB) for much of the past 52-weeks). Stock market chart analysis indicates further upside momentum, with a longer term uptrend (from 2009) currently in place.  

The current weekly chart indicates a number of bullish candles (10-Year timeframe), indicating that investor enthusiasm for the name is positive for now. However if price moved below the 3500p level (for a period of 5 days or more) over the coming  quarters this could indicate that the trend is changing and getting more negative.

Stock specific risks to be aware of include further legislation against nicotine products, as well as any signs of more sustained volatility within emerging markets (EM accounts for circa 70% of sales). Many EM countries have seen their currencies move sharply lower versus the dollar, which has in turn resulted in rising raw material costs and pressure on margins. Profits from these regions have also been impacted when translated back into sterling (BATS reporting currency).

MOST RECENT FIGURES/ OUTLOOK

BATS made good underlying progress against a more challenging backdrop for FY2015 (reported 25th February). Top-line for the year increased by 5.4% at constant exchange rates. On an actual exchange rate basis, revenue was lower by 6.2%, which reflecting sterling strength versus overseas trading currencies. Group Cigarette volumes were lower by 0.5% over the period, with a like for like decline of 0.8%, which compared well against an estimated industry decline of 2.3%. BATS continued to drive market share as a result of its Global Drive Brands initiative, with margins also holding steady, (operating margin would have improved by some 160bps, but was impacted by FX swings which resulted in a fall of 60bps to 38.1%).

The Co. invested $4.7 billion to maintain its 42% share of RAI of the U.S., acquired TDR in Croatia for €550 million and completed the $1.7 billion purchase of shares not already owned in Souza Cruz S.A. BATS also acquired an e-cigarette company in Poland and signed a vapour collaboration agreement with Reynolds as well.

For dividend investors management recommended a final dividend of 104.6p, taking the total 2015 dividend to 154.0p, (an increase of 4%).

STOCK SENTIMENT

Institutional sentiment is currently positive on the name with average target prices in or around current levels.

NEAR TERM CATALYST

The Co. is due to report Q1 figures on the 26th April which is followed by an Annual General Meeting on the 27th of the month.  

Article by TradingHD.com

Source Data: Bloomberg, Company Accounts/ Presentations, Third Party Industry Research, Deydun. Author: Ashwani Mathur

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