British American Tobacco beats on first-half sales, helped by higher demand for e-cigarettes

A customer smokes British American Tobacco Plc’s Glo smokeless tobacco device in Tokyo, Japan, June 26, 2017.

Akio Kon | Bloomberg | Getty Images

British American Tobacco beat first-half sales forecasts on Thursday, helped by higher demand for e-cigarettes, and predicted a stronger performance in the second half as it focuses on a smaller number of fast-growing new age brands.

Shares in the world’s second-biggest tobacco company by sales were up 6.6% at 3,148.5 pence in mid-session trading, on course for their best day since the financial crisis. The stock was among the top gainers on the blue-chip FTSE-100.

In his first set of results as chief executive, Jack Bowles said BAT would slim down its “new categories” business into three main brands.

By focusing on vuse for e-cigarettes, velo — a nicotine pouch for the gums — and glo for tobacco heating devices, Bowles said BAT would see fewer complexities and faster decision making when responding to new trends.

“This will allow us to focus our resources and internationalize our consumer propositions,” he said on a call.

BAT, like rivals, is striving for a bigger chunk of the global market for smoking alternatives as volumes of traditional cigarettes continue to slide.

The company forecast U.S. cigarette volumes would now fall 5.5% this year, more than its previous estimate for a 4-5% decline, as tougher regulation, higher living costs and growth in e-cigarettes continue to hit its cash cow business. The U.S. market contributes a third of BAT’s overall sales.

On Tuesday, bigger rival Altria Group said U.S. volumes could fall as much as 6% this year.

Still, BAT, the maker of Lucky Strike and Dunhill cigarettes, said it was on track to deliver high single digit growth in constant currency-adjusted earnings this year and to increase operating margins by up to 1 percentage point.

‘Solid half year’

First half revenue rose 4.6% to 12.17 billion pounds ($14.8 billion), beating analysts’ average forecast of 12.09 billion pounds.

Growth came mainly from new categories, where revenues rose 27% to 531 million pounds. That helped offset a decline in U.S. cigarette sales.

“This was a solid half year for BAT. Their focus on key global brands and next generation products is sustaining the group’s earnings power at a time when the regulatory pressure on the industry is stepping upwards,” said Steve Clayton, manager of HL Select funds, which holds a position in BAT.

BAT also said the British American Tobacco UK Pension Fund struck a deal in May to transfer 3.4 billion pounds of assets to Pension Insurance Corporation.

The deal, the third largest so-called pensions buy-in transaction in the United Kingdom, secures benefits for 10,600 members, including 8,300 pensioners and 2,300 non-pensioners, the company said.

BAT’s adjusted earnings per share came in at 149.3 pence, beating analysts’ estimates of 146.15 pence, according to Refinitiv.

BAT also said it was on track to be “around the middle” of its guidance range of 30-50% for annual revenue growth from new categories, on a constant currency basis.

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