This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.
Shares in British American Tobacco trade 5% lower this morning after FY 2017 results, made complicated by the recent acquisition of Reynolds, disappointed.
2017 FY revenues (£20.3bn reported, £20bn adjusted, £19.3bn adj. at constant currencies) missed consensus of £20.6bn, however, pre-tax income was either a beat at £8.1bn on an adjusted basis or bang inline at £7.8bn when adj. for constant currencies. Importantly, both metrics suggest a currency boost which, of course, can’t exactly be relied upon for growth forever.
The real problem, however, looks to be volume growth (the be-all-and-end-all in tobacco sales) of +3.2%, thanks only to the monster Reynolds acquisition. Excluding the purchase, volumes fell 2.6% organically, although Global Drive Brand (GDB) growth of 7.6% was a big rebound from -1.3% in H1, and total organic growth did at least outperform a market -3.6%. Nonetheless, falling volumes are a problem unless you can keep increasing prices. Comments about a challenging trading environment, even after a transformational deal, also ring loudly in investors ears.
Even a 15% dividend hike and attractive yield is failing to help, with the bond-proxy suffering even more on the back of higher US bond yields overnight after January Fed meeting minutes suggested optimism in economic growth and determination to act, which may imply higher rates, and sooner. This may further entice income seekers towards a safe circa 3% fixed return from the US Treasury away from the risk of having to weather further capital depreciation for 4.5-5.5% income. Don’t forget the shares benefited handsomely from years of low rates and QE (shares +275% from financial crisis lows) but have suffered since yields began to recover last summer (shares -24% since last June).
Shares trading lows of the day, testing late-2016 lows, in the midst of what looks like a bearish flag pattern which began 23 Jan, paused 9-21 Feb and today begun the second down-leg. Potential for pattern to complete as low as £38, last traded this time two years ago. With volumes clearly under perennial pressure, hopes need to be high that a deal to form the “world’s leading international tobacco and Next Generation Products (NGP) business” can deliver on the latter rather than rely on the former.
Mike van Dulken, Head of Research 22 Feb
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research
Comments are closed.