Tobacco companies' vaping fervour will dent profits, RBC warns
Big tobacco companies' newfound enthusiasm for vaping threaten the groups' profits, said RBC Capital Markets, leading it to downgrade its rating on Imperial Brands and British American Tobacco.
British American Tobacco
2,695.00p
17:15 31/10/24
FTSE 100
8,110.10
17:09 31/10/24
FTSE 350
4,473.68
17:14 31/10/24
FTSE All-Share
4,431.83
17:09 31/10/24
Imperial Brands
2,337.00p
16:45 31/10/24
Tobacco
31,583.83
17:14 31/10/24
For both companies, RBC expects next-generation products (NGPs) such as ecigarettes, which are lower margin than cigarettes, will continue to outgrow the core tobacco business and so lead to a "negative mix effect on profitability".
The pair were both downgraded to 'underperform' from 'sector perform', with the price target for BATS cut to 3,400p from 3,900p and for Imperial to 2,400p from 2,800p, both due to reduced margin expectations.
RBC's research shows that there is "no correlation between the tobacco companies' local market dominance and their high margins".
"We believe their high profitability is down to the industry's historically insurmountable barriers to entry: regulations, economies of scale in manufacturing and the controversial nature of the industry."
BATS plans to get NGPs up to 30% of revenues by 2030, from an estimated 4% in 2018 and RBC does not expect NGPs to reach the same high margins as the combustible cigarette business, "considering the higher fragmentation and lower concentration of the market".
"Therefore such ambitious NGP targets pose a material threat to BAT's profitability," analysts added, assuming a 750 basis point margin decline by 2030.
Imperial said it was stepping up NGP investment, investing £300m this year and by 2020 aiming to have its Blu vaping devices available in more than 20 markets.
Likewise, RBC felt such targets pose a material threat to Imperial's profitability, also assuming a 750 basis point margin decline by 2030.