BAT: H1 2023 Results

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– Revenue: £13.44Bn (vs. £13.3Bn expected)

– Revenue up +2.8% (New Categories up +27.9%)

– Revenue from New Categories: 12.3% of total


– Adj. Operating Profit: £6.02Bn (vs. £5.9Bn exp.)

– Adj. Operating Margin: 44.8% (vs. 44.4% exp.)

– Contribution from New Categories: -£12Mn (break-even in sight)

– Adj. EPS: £1.816 (vs. £1.75 exp.)

Key Highlights – the US Market (54.9% of the total operating profit):

– Combustible: volume -12.4%, revenue -7.4% (only one list price increase in H1 2023: 15-38¢/pack effective as of Jan 2; the second list price increase, 12-40¢/pack, effective as of July 3)

– Combustible volume loss (-12.4%) explained as: Market decline (-8.4%) + Share loss (-2.7%) + California menthol ban (-0.6%) + SAP roll-out inventory impact (-0.7%)

– Vapour (Vuse): volume -6.5% (due to the growth of “illicit” synthetic nicotine disposables – now estimated to be more than 50% of the total market), revenue +23% (substantial net price increases)

– Revenue: -5.4%, Operating profit: -0.2% (Note: In FY22, BAT recorded +3.5% operating profit increase in the US despite a -2.8% decline in revenue. Operating profit decline in H1 2023 is – presumably – attributable to the timing of the second cigarette price increase)

– Commercial plans (based on digitally enabled Revenue Growth Management capabilities) starting to deliver early signs of US combustibles recovery: BAT’s May 2023 volume share is up +60bps vs. Jan 2023, driven by +100bps improvement in the premium segment (note: this trend needs to be re-validated after the 2nd list price increase in July 2023)

Key Highlights – New Categories (NGP):

– Category contribution: -£12 Mn (losses down 97.6% on adj. organic, constant FX basis). The category is now profitable in 20 markets. This is a very important achievement as – excluding the distant category leader, PMI – there is no other major tobacco company that comes close to break-even in NGPs (the next one: Japan Tobacco in 2028)

– BAT mentioned of “H2-weighted NGP investment (commercial)” and “non-linear progression towards NGP profitability”. Thereby, we believe H2 2023 NGP losses are likely to be more than £12Mn. Moreover, fluctuation in NGP bottom-line is also likely beyond 2024 depending on product line and geographical expansion

– Revenue: +27.9% (e-cigarette +35.5%; heated tobacco +11.8%; modern oral +42%)

– Vapour (Vuse): “2024 NGP profitability target” will be delivered mainly through Vuse pricing (- vapour gross margins are up from 32% in FY20 to 58% in H1 23). Three of the five key e-cigarette markets are profitable, driven by increased scale and marketing spend effectiveness. Vuse value share up +240 bps, reaching 38.3% in key e-cigarette markets (46.7% in the US). Note: BAT’s reported market shares are based on a self-defined subset of the overall e-cigarette market

– Heated tobacco (glo): Sequential shipment volume decline (vs. H2 2022). Category volume share in key markets declined 110 bps to 18.2% (especially, under-performing in the most important/competitive markets, such as Japan and Italy). This re-confirms the growth momentum PMI gained with IQOS Iluma. glo Hyper x2 Air launch is a first step to improve the segment performance (available in 9 markets, further roll-outs planned in H2 2023). Significantly strengthening the heated-tobacco capabilities through new innovation centers/hubs. Our take: it will take time (3-5 years) to address the glo performance gap as this is a R&D driven (long duration) process

– Modern oral (Velo): US Market in a standstill (awaiting the outcome of PMTA submission for new Velo product). Overall volume up +32.2% despite the US (volume down -37.7%). Outside the US, clear volume share leadership maintained, with Mini pouches and Max ranges driving strong growth. Strong growth in new markets: Pakistan and Kenya.

Other Key Highlights:

– BAT’s business is performing pretty well outside the US. Operating profit is up +4.4% and 9.3% in AME and APMEA Regions, respectively

– BAT’s share of ITC’s post-tax results up +21.8% (£319Mn): the economic recovery in India from COVID-19, more than offsetting FX headwind

– Net finance costs are up +12.7% to £921Mn (+10.7% on adj. constant currency basis), mainly due to the higher interest expense (i.e. average cost of debt has increased to 4.3% from 4.0% in FY22)

FY23 Guidance

On track to deliver FY23 Guidance. Top/bottom-line growth projections are unchanged

– Organic revenue growth: 3-5% (H2 weighted)

– EPS growth: mid-single digit (80+% combustible pricing already realized in H1 2023)

– Increased net finance cost to £1.9Bn

– FX impact: -2% headwind on Operating profit (previously, -1% headwind on FY EPS)

Our take-away

Overall, the key issues persist: cigarette volume decline in the US and under-performance in heated tobacco. In addition, the competitive environment is becoming more challenging in e-cigarettes (the key segment for BAT’s 2024 NGP profitability target). In terms of headline risk, deeming US menthol ban is the Sword of Damocles hanging over BAT’s head.

However, all these issues are well-known and, presumably, are already priced in: i.e. BAT’s American Depository Shares (“BTI”) are down 28% from Feb 2022 high. In the two sessions following the H1 2023 earnings release, BAT share price (“BTI”) is barely changed (up less than 0.1%).

The progress towards NPG profitability and the business performance outside the US (including the ITC participation in India) are noteworthy, but it is not easy to prosper financially when half of the business (by operating profit) is under stress. Developments in the US market will continue to unequivocally influence the BAT share price in the short-term.

BAT share price is in a declining channel, searching a bottom. The last local low was printed on May 31, 2023 at $31.6 (“BTI”) – at the time when the market was pricing in an unknown/big governance risk related to the sudden departure of the previous CEO. Is the low in? Difficult to say because of the headline risk caused by the deeming US menthol. A knee-jerk market reaction could trigger a 10% price retracement to $30.

With or without a further retracement, we expect moderation in the US cigarette market decline and the wider recognition of the extended implementation timeline for the US menthol ban will help BTI to seal a bottom. A re-emergence of “rotation to value” trade could also support the process. As the bottom is formed, we expect BTI to trade in a range (high 30s & low 40s) until the persistent issues are resolved. Stabilization in the US market (including more regulatory clarity) coupled with NGP/RRPs turning profit (plus improving HnB SoM) could help BAT to partially close the valuation gap vis-a-vis the arch-rival, PMI, and could eventually lead BTI higher in 2024 and beyond. We believe the combined value of BAT’s parts (1. Reynolds, 2. An international tobacco/nicotine business, 3. ITC stake) is more than the BAT’s current market value and we remain cautiously optimistic as long as the BAT’s new Management Team continues to take the right steps. 


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