- US combustibles and Glo brand are the weak spots
- New CEO confirms no change to existing strategy
- Shares down 22% year-to-date
The latest trading update from British American Tobacco (BATS) was a mixed bag, leaving the shares in their depressed state.
Year-to-date the stock is down 22% as investors shun many value-style shares – including tobacco manufacturers – in preference of higher growth businesses, particularly in the technology space.
Also acting as headwinds for British American Tobacco shares are various calls for governments to clamp down on vaping amid concerns that too many young people are participating in the activity despite the risks to their health.
‘Tobacco companies are pinning their hopes on mass take-up of next generation products such as vaping, yet they face considerable push back from regulators, health campaigners and more. Each week there seems to be someone else calling for tougher rules on vaping, in particular, with children’s doctors the latest to say the rules have to change. They imply youth vaping is a serious problem and needs to be stamped out immediately,’ says Russ Mould, investment director at AJ Bell.
‘British American Tobacco will be no stranger to dealing with these headwinds, but in this modern world it has a responsibility as a good corporate citizen to ensure its products are not harming society.’
The company said it increased the number of consumers of non-combustible products by a further 900,000 in the first quarter of 2023, and further reduced the losses in its ‘new categories’ business which includes the Vuse vaping brand and Glo tobacco heating products.
However, its US combustibles business has been struggling and the Glo brand had ‘an underwhelming’ start to the year, according to new chief executive Tadeu Marroco, who also confirmed he would make no change to the corporate strategy in place before he took over from Jack Bowles in May.
‘Our commitment to building “A Better Tomorrow”, by reducing the health impact of our business through a multi-category portfolio of reduced-risk products remains,’ commented Marroco.
‘Put simply, smokers must have access to better choices. This is already a reality for smokers who have made the switch to our reduced-risk products. It also represents a commitment to our consumers who continue to smoke and are yet to make that transition.’
Charlie Huggins from Wealth Club commented: ‘It is hard to describe British American Tobacco’s future as anything other than highly uncertain. Its high margin, core combustibles business is in steady decline, with scope for that decline to accelerate as the shift to reduced risk next-generation products gathers pace.
‘And while British American Tobacco has made progress with its transition to next-generation products, it still has a long way to go to convince investors that the margins and returns can come close to combustibles.’
The company believes global tobacco industry volumes are expected to be down 3% in 2023. It has guided for 3% to 5% constant currency revenue growth, and mid-single figure constant currency adjusted diluted earnings per share growth.
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DISCLAIMER: AJ Bell is the publisher of Shares magazine. Daniel Coatsworth who edited this article owns shares in AJ Bell.
