Shares in British American Tobacco (BATS) cheapen 43.5p (1.6%) to £27.52 on Thursday, despite the tobacco titan beating expectatinos for annual sales and earnings per share and a fairly positive outlook statement.
The share price drop reflects ongoing concerns over rising regulatory pressures in the US and the fact British American Tobacco faces potentially huge compensation payouts in Canada, the latter particularly worrying given its £44.4bn net debt load and high net debt-to-EBITDA ratio of four-times.
For the 2018 calendar year, the world’s second biggest international tobacco company reports operating profit up 45.2% to £9.31bn on revenue 25.2% higher to a consensus-beating £24.5bn.
Results were boosted by a full year’s contribution from 2017’s transformational takeover of Reynolds American, as well as cigarette market share gains and rapid growth from its next generation of less harmful offerings including tobacco heating and vapour products.
Set to retire on 1 April and hand over the baton to Jack Bowles, chief executive Nicandro Durante insists his charge ‘performed well in 2018, exceeding our target of high single figure adjusted constant currency earnings per share growth, whilst continuing to invest in long-term sustainable returns’.
NORTH AMERICAN CAUSE(S) FOR CONCERN
Durante rightly recognises that proposed potential regulatory changes in the US ‘have created some investor uncertainty’. Yet he points out the Kent, Dunhill, Lucky Strike and Pall Mall maker has ‘a long experience of managing regulatory developments, a track record of delivering strong growth while investing for the future and an established multi-category approach’.
Furthermore, Durante is confident of another year of high single figure-adjusted constant currency earnings growth in 2019 - this confidence is reflected by a 4% hike in the dividend to 203p.
Nevertheless, sentiment towards British American Tobacco and the wider tobacco sector remains poor.
In Canada, British American Tobacco is appealing against class actions which could see it having to pay out billions in damages to provincial governments looking to recover healthcare costs arising from having to treat smoking and health-related diseases.
And in the very short term, British American Tobacco faces a Canadian appeal court judgement on a smokers’ class action damages suit, expected tomorrow evening, which could see the company landed with a lumpy £6bn compensation bill.
Also weighing on sentiment is the uncertainty engendered by news of further management upheaval.
Finance director Ben Stevens is also set to step down and retire from the board on 5 August following 30 years with the company, 11 of them in his current role, during which he has been an instrumental figure in British American Tobacco’s consistent earnings and dividend growth. He will be succeeded by Tadeu Marroco who is currently a regional director at the tobacco firm.
