BAT earnings growth heats up, finance chief retires

British American Tobacco grew underlying earnings above its target range last year despite cigarette volumes declining 3.5% as it predicted.

BAT, where chief executive Nicandro Durante is stepping down in April after eight years in charge, also announced that finance director Ben Stevens will retire in August, after 30 years with the company. He will be replaced by Tadeu Marroco, currently director in charge of the group's transformation programme, who has been appointed deputy finance director until he assumes the full role.

Although total volumes were down, the group's key markets, which represent more than 80% of sales, volume was down 2.7%, outperforming the industry's 3.4% contraction. Moreover, strategic cigarette and the new tobacco heating products (THP) grew volumes 5.8%, led by led by a 217% increase in THP consumables to 7bn sticks.

Group revenue increased 25% to £24.5bn, with adjusted revenue down 2.3% if excluding acquisitions, but up 3.5% if also excluding currency swings.

Agjusted revenue from THP and vaping products soared 95% to £901m, mostly from vaping products in the US and the Glo THP brand in Japan. Buoyed by its bulging product pipeline, management continues to expect these new categories will produce revenue of £5bn by 2023/2024.

Adjusted operating profit of £10.35bn was down 1.5% but up 4% if currency effects are ignored. Earnings per share came in at 296.7p, up 5.2% or 11.8% at constant currencies - better than the average analyst forecast of 290.6p.

Net debt was cut 2.7% to £43.4bn and the dividend was hiked 4% to 203.0p.

"We recognise that the proposed potential regulatory changes in the US have created some investor uncertainty," said Durante. "We have 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. I am confident that my successor, Jack Bowles, will continue to deliver a similar level of sustainable long-term returns as we accelerate our Transforming Tobacco agenda."

In particular, he highlighted that the US Food and Drug Administration's proposed ban on menthol cigarettes "must be developed through a comprehensive rule making process, be based on a thorough scientific review and consider all unintended consequences in order to withstand judicial review".

Looking at 2019, Durante said the board was confident of another year of high single-figure adjusted constant currency earnings growth.

BAT shares

Citi analysts said they believe this set of results "will do little to resolve the debate about BAT".

"Bulls can argue that its 2018 EPS and 2019 guidance shows nothing has really changed in its earnings algorithm, and that this means its current P/E is therefore far, far too low.

"Bears can argue that it isn’t proactively adapting itself to the New World of Tobacco. They would say that (1) it increased its investment in NGPs in 2018 only in response to the unexpected US tax cut, (2) it’s a long way behind in both heated tobacco and vapour, and (3) all other competitors are rapidly upping their game."

Citi retained its 'neutral' rating, noting that one critical factor in 2019 will be how its next-generation products develop - "and we think it is far too early to make a definitive call on these".