ii view: BAT driven by momentum in new category vape products

Ethical concerns battle a change of focus and a yield of over 7%. Buy, sell or hold? 

First-half trading update

• Added 1.4 million non-combustible product consumers in Q1 to reach a total of 14.9 million

Guidance:

• Upgraded full-year constant currency revenue growth to above 5%, from a previous 3% to 5% estimate
• Expects full-year mid-single digit adjusted diluted constant currency earnings per share growth

ii round-up:

Founded in 1902, British American Tobacco's (LSE:BATS) traditional cigarette, or combustible brands today include Dunhill, Rothmans, Kent, Lucky Strike and Camel.

Its collection of non-combustible products includes alternatives such as vapour products, tobacco heating items, and modern oral nicotine pouches, as well as traditional oral products such as snus and moist snuff. 

New category brand names include Vuse, Vype, Glo and Velo. Other non-combustible by traditional oral product brands are Camel Snus and Grizzly.  

For a round-up of this latest trading update, please click here. 

ii view:

The negative impact on health from smoking is no longer disputed. As such, tobacco companies like BAT have been investing heavily in alternative products. BAT launched its first new category product not long after 2012. It is now targeting new category revenue of £5 billion come 2025. During its last full but pandemic hit financial year, sales of new category products such as vapes grew by almost 15% to £1.44 billion. Non-combustible sales, which includes traditional oral products, totalled £2.6 billion. Combustible revenues fell by 1.1% to £22.75 billion. 

For investors, the bulk of BAT's sales still come from health hazardous traditional tobacco products. Health concerns and deaths relating to new category products also need to be remembered, as do concerns regarding new vape users who previously did not smoke and may have been attracted to flavoured products. Ethical issues simply leave the industry as untouchable for many.

More favourably, BAT and the broader industry’s migration towards what are largely considered lower-risk alternative products is a major change. Evidence of growing new category sales continues to be seen. Ethical issues are also attempting to be counterbalanced by climate change initiatives, and a historic and forecast dividend yield of over 7% is tough to ignore in a world of ultra-low interest rates. In all, and while ethical concerns understandably override all other factors for many, an estimated forward price/earnings (PE) ratio below the 10-year average potentially points to long-term value.

Positives:

• Increased focus on new category vape products
• Attractive dividend income

Negatives

• Covid-19 travel bans hitting sales
• Doubt over the safety of new category products

The average rating of stock market analysts:

Strong buy