JPMorgan puts BAT on ‘negative catalyst watch’, cuts price target

JPMorgan Cazenove slashed its price target on British American Tobacco on Wednesday to 2,800p from 3,100p as it placed the shares on ‘negative catalyst watch’, saying that a challenging first half leaves guidance at risk.

JPM - which rates the shares at ‘neutral’ - noted that amid incremental FX headwinds, US cigarette data continues to disappoint, while US e-cigarette data has also begun to soften. To reflect this, the bank cut its FY23/24 adjusted earnings per share estimates by 4%/6%.

"Despite assuming normalisation of US cigarette trends in H223 (which may prove to be optimistic), we now model just +3.6% constant currency (CC) EPS growth on +3.5% organic sales in FY23E, at the bottom end of the current guidance range," it said.

"We expect H1 to be especially weak with +1.4% CC EPS as underlying weakness and unfavourable shipment phasing drives US cigarette volumes down 15%."

JPM said that while its base case is that FY23 guidance will be maintained for +3-5% organic sales and MSD constant currency EPS growth, it sees risk that guidance could move lower given the weak US trends.

"As a result, we place shares on negative catalyst watch into H123 results on 26 July, where we sit 4% below Bloomberg consensus EPS.

"While we acknowledge that headline valuation appears attractive with shares trading near all-time lows on just 6.6x 2024 P/E and 5.9x, we note that visibility (both operationally and regulatory-wise) remains very limited as we continue to await an inflection in the US data, as well as US regulatory decisions on cigarettes and e-cigarettes."