British American Tobacco shares smoked after mixed results

British American Tobacco reported on a record revenues on Thursday, though while the “transformational” acquisition of Reynolds American helped revenue surge to £20.29bn, this was short of market expectations.

The FTSE 100 tobacco giant said its adjusted, organic revenue was ahead 2.9% at constant exchange rates at £15.71bn, while its adjusted, organic profit from operations was up 3.7% at £5.91bn.

That was off a total profit from operations of £6.48bn - up 39.1% on 2016.

Diluted earnings per share rocketed ahead 634% to 1,830p, while adjusted earnings per share were ahead 9.9% at constant exchange rates to 284.4p.

The BAT board confirmed a dividend per share of 195.2p for the year, which was a 15.2% improvement on that paid in the 2016 year.

On the operational front, the board said the highlight of its year was the successful completion of the acquisition of Reynolds American on 25 July, for a total consideration of £41.8bn in a combination of cash and ordinary shares.

It also continued the roll-out and investment in the development of ‘next-generation products’ (NGP), with the national roll-out in Japan of its tobacco heating product ‘glo’ achieving 3.6% national share, as well as launches in five new markets combined with the continued growth of the company’s vapour portfolio.

The volume of cigarettes and tobacco heating products grew 3.2%, driven by the acquisition of Reynolds American, and it fell on an organic basis by 2.6%.

That still outperformed the market, which declined by an estimated 3.5%.

The group's cigarette market share grew 40 basis points, which the board said was driven by the ‘Global Drive Brand’ portfolio, with volume up 7.6% on an organic basis with market share up - excluding the US - by 110 basis points.

Operating margin, at current rates, was ahead of 2016 by 30 basis points at 31.9%, or by 270 basis points on an adjusted basis and by 40 basis points on an adjusted organic basis.

“The transformational deal to acquire RAI marked a record year in 2017,” said BAT chairman Richard Burrows.

“The group continued to deliver on its commitment to high single figure constant currency earnings growth, substantially reinforced the long-term sustainability of that growth with the largest acquisition of a tobacco company ever completed and achieved significant success in its next generation products business

“This is an exciting time for the group, and the board has confidence in the Group's ability to continue delivering sustainable growth in the years to come.”

BATS shares fell almost 5% to 4,235.5 after just over an hour's trading on Thursday.

Analyst Mike Van Dulken at Accendo Markets noted that revenues fell short of expectations and volumes fell if excluding Reynolds.

Revenues, variously £20.3bn reported, £20bn adjusted, £19.3bn adjusted at constant currencies all missed the consensus forecast of £20.6bn, though pre-tax income was either a beat at £8.1bn on an adjusted basis or bang in-line at £7.8bn when adjusted for constant currencies. "Importantly, both metrics suggest a currency boost which, of course, can’t exactly be relied upon for growth forever," he said.

"The real problem, however, looks to be volume growth (the be-all-and-end-all in tobacco sales) of +3.2%, thanks only to the monster Reynolds acquisition. Excluding the purchase, volumes fell 2.6% organically basis, although Global Drive Brand (GDB) growth of 7.6% was a big rebound from -1.3% in H1, and total organic growth did at least outperform a market -3.6%.

"Nonetheless, falling volumes are a problem unless you can keep increasing prices. Comments about a challenging trading environment, even after a transformational deal, also ring loudly in investors ears."