British American Tobacco is lit ahead of smoking second half

Fresh from completing the massive acquisition of US rival Reynolds earlier in the week, British American Tobacco announced a solid set of first-half numbers, made to look even nicer thanks to strong currency tailwinds.

The cigarette maker, which snapped up the remaining 57.8% of Reynolds American it did not already own for $49bn in cash and shares, generated £7.7bn of revenue in the six months to 30 June, up 15.7% thanks to the weakness of sterling, or up 3.5% at constant exchange rates.

Adjusted revenue, adjusted for excise on goods bought in from third parties, was up 2.5% at constant rates of exchange to £7.65bn.

Volumes of cigarettes sold were down 5.6% to 314bn, which was not as bad as some analysts had predicted, with volume at BAT's 'global drive brands' -- Lucky Strike, Kent, Dunhill and Pall Mall -- down 1.3%.

Excluding Pakistan, which was hit by stock movements ahead of rise in excise duties and subsequently saw a market contraction, group volumes declined 2.6%, with the GDBs up 2.6%.

Market share in key markets grew 30bps, driven by the GDBs, which gained 50 bps.

With smokes on the wane, BAT has high hopes for its 'next generation products', including a tobacco-heating product called Glo, which reached an estimated 8% market share in Sendai, Japan, its first launch market, with early progress in other launch markets "above expectations".

In vaping, the group is the largest company in the world, via its Vuse brand in the US, and Vype and Ten Motives in the UK and Poland.

The successful completion of the Reynolds acquisition bolsters the group's leading position in combustibles and NGP, although the European vapour business is still fairly immaterial in size in the context of the group.

With a strong price mix that helped widen adjusted operating margins 30 basis points to 37.1%, adjusted profit from operations grew 15.8% to £2.8bn or up 3.2% at CER.

Basic earnings per share fell 15.3% to 121.8p due to the impact last year of asset sales by Reynolds American, which was then 42%-owned by the FTSE 100 group.

An interim dividend of 56.5p was declared, up 10% on last year, with the group moving to quarterly dividends from 1 January 2018.

Chief executive Nicandro Durante continues to expect profit growth to be weighted to the second half of the year, though it will be moderated by the continued roll out of NGP and is against a strong prior year numbers from Ukraine.

"Although the challenging environment in a number of markets continues, including in Russia, I am confident that we remain on course to deliver another year of good earnings growth at constant rates of exchange."

BATS shares were up 1.4% to 5,436p in early trade on Thursday.

Charlie Huggins, a fund manager at Hargreaves Lansdown with a BATS stake in two of his funds, said the interim dividend increased cemented the group’s status as one of the most reliable income payers in the market.

"The integration of Reynolds is progressing to plan and work has already begun to realise the projected cost synergies. The deal gives BATS a deeper presence in the highly profitable US market, while the anticipated cost savings from the deal should be very helpful for margins.

On NGRs, he said: "Persuading smokers to switch from cigarettes to these newer generation, supposedly lower harm products, could see big increases in the profits the tobacco company makes, compared to a smoker who sticks to the traditional evil weed."