ii view: a mixed bag for BATS shareholders

A dividend yield in excess of 6% is a rarity, but Covid-19 offers yet another headwind. 

First-half trading update 

Guidance

• Full-year (FY) currency adjusted revenue in the 1-3% range, down from the lower end of the 3-5%
• Mid-single digit FY currency adjusted earnings per share growth, down from a high-single digit
• Speed of debt reduction lowered due to Covid-19 impact
• Unchanged dividend policy

Chief executive Jack Bowles said:

" Our primary focus remains the health and well being of our employees and we are working hard to best ensure their safety and minimise the risk of virus transmission. As a global business we are also leveraging our distribution and manufacturing capabilities to support the wider community at this difficult time.  

“We have made a good start to the year, with strong volume and value share growth in combustibles underpinning the sustainability of the business. 

“Our focus on becoming a faster, simpler, more agile business through Project Quantum has positioned us well for continued delivery in the current environment and these efforts have ensured we are a highly resilient company.”

ii round-up:

BATS' (LSE:BATS) portfolio of cigarette brands is today accompanied by a growing range of potentially reduced-risk products.

Its traditional or combustible brands include Dunhill, Kent, Pall Mall, Lucky Strike, and Rothmans. Non-combustible or new category brands include vuse, vype, glo and velo. 

Its products are distributed to 11 million sales outlets in over 180 markets worldwide. It employs more than 53,000 people globally. 

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 BATS and Imperial Brands (LSE:IMB) have been investing in alternative products.  

But a series of deaths in the US linked to new category products has raised questions over their safety, although many such deaths appear to be linked to those vaping the cannabis compound THC. Concern regarding new vape users who previously did not smoke, and may have been attracted to favoured products, has also grown. As such, government regulation, particularly in BATS' core market of the US, has increased. Now Covid-19 is hindering sales because of travel bans under government lockdowns. 

For investors, news of an unchanged dividend policy is positive. A dividend yield in excess of 6% (not guaranteed) is a rarity in a Covid ravaged world. A forecast single-digit price/earnings (PE) ratio also points to an undemanding valuation. However, doubt over new category alternative products plus Covid-19 lockdowns add another hurdle to sales and increase risks for investors.

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 has risen

The average rating of stock market analysts:

Strong buy