British American Tobacco

 

Heftier cigarette prices bad news for BAT’s earnings in coming quarters

 November 5, 2015, Thursday Ronnie Teo, ronnieteo@theborneopost.com

Pricier cigarettes may lead to further down-trading BAT’s flagship brands, Dunhill and Kent which will now retail for RM17 per pack, while its value-for-money brands will now sell for RM15.50 per pack. — Reuters photo

KUCHING: Analysts are less optimistic on cigarette maker British American Tobacco Bhd’s (BAT) outlook following the announcement of a price hike for its brand cigarettes.

On Tuesday, the government increased the excise duties on cigarettes by 12 sen per stick to 40 sen per stick. Consequently, BAT increased its retail prices by RM3.20 per pack across the board effective yesterday.

This translates into an increase of 16 sen per stick. Its new premium product, Shuang Xi brand, will be priced at RM18 per pack. Overall, this brings BAT’s year to date  increase in cigarette prices to RM3.50 per pack, or 17.5 sen per stick.

Analysts at MIDF Amanah Investment Bank Bhd (MIDF Research) expect earnings for BAT to be impacted in the midst of a challenging outlook for cigarette players in general.

“We expect the price hike to impact its earnings for 2015 due to the possibility of a volume drop in November and December months,” it detailled in a note yesterday. “Historically, the volume would most probably rebound after two or three months of experiencing a decline.

“However, in this current environment, with the growing presence of vapes (electronic cigarettes) and the still widely accessible illicit cigarettes, we believe that it would be an uphill challenge for BAT’s volume to rebound to its current levels.”

Although MIDF Research believe that the demand for cigarettes will remain in the uptrend for the longer term, it said it would be “an extremely tough challenge for BAT to maintain its sales volume in the shorter term.

Meanwhile, Affin Hwang Investment Bank Bhd (AffinHwang Research) said pricier cigarette sticks may lead to further down-trading BAT’s flagship brands, Dunhill and Kent which will now retail for RM17 per pack, while its value-for-money (VFM) brands will now sell for RM15.50 per pack.

“Although margins may be maintained, we believe that sales volume may suffer as a result and the risk is that this could develop into a larger shift to illicit cigarettes and potentially e-cigarettes, especially when prices go way past affordable levels,” it said.

“Despite the government’s effort in clamping down the illegal cigarette market, the market share for illicit cigarettes still stands at about one-third of the tobacco industry.”

“We also expect this huge price hike to further support the alternatives, such as illicit cigarette market, as smokers would be hard-pressed in view of the increasing cost of living.

“In view of the massive price hike in cigarettes, there is a strong likelihood for some smokers to either switch to a cheaper brand, illicit cigarettes or shift to vapes as it is now arguably cheaper than smoking conventional cigarettes.”

As such, the research house revised the earnings for FY15 and FY16 downwards by four per cent and 5.1 per cent to factor in the loss in volume due to the price hike.”

Read more: http://www.theborneopost.com/2015/11/05/heftier-cigarette-prices-bad-news-for-bats-earnings-in-coming-quarters/#ixzz3qwfdlrH4

Investing in decline

British American Tobacco (BATS) published a gargantuan number this week: CAD$15.6bn (£8.2bn). Unfortunately, this has nothing to do with its financial results - the group made pre-tax profit of £4.8bn last year - but is instead the amount awarded to smokers by a Canadian court for "moral and punitive damages". BATS' Canadian subsidiary is liable for two-thirds of the sum.

Shareholders need not fret yet: the legal battle has already been rumbling on for 10 years, and the three tobacco companies inculpated will challenge the judge's ruling. The public smoking bans and tax increases introduced in countries ranging from Brazil through the Philippines to Turkey are of more immediate consequence. Manufacturers used to rely on emerging markets to offset falling volumes in Europe and North America, but this growth engine has stalled.

The latest government crackdown is in China, the world's largest cigarette market. On the same day as the Canadian legal judgement, Beijing banned smoking in restaurants, public transport and offices - the strictest restrictions yet introduced in the country. The direct impact on BATS and Imperial Tobacco (IMT) will be limited, as the Chinese market is virtually monopolised by China National Tobacco Corporation (although BATS did launch a joint venture with CNTC in 2013). But the move does highlight the direction of travel across the developing world.

But the fascinating thing about tobacco companies is just how successful they have been at managing decline. In 2006, BATS sold 691bn cigarettes and was worth £29.6bn on New Year's Eve. In 2014, it sold 667bn fags and attracted a year-end market valuation of £65.2bn. The figures for Imperial Tobacco show the same pattern. For investors, this is a very instructive contradiction.

Tobacco groups have wrung growth out of a shrinking market in three ways. 

1.  Firstly and most importantly, they have continually increased prices. This has worked because demand for cigarettes is infamously 'inelastic': consumers pay up even if prices rise. Moreover, in many countries the price of a packet of cigarettes consists mainly of tax. In Britain a full 77 per cent of the typical price of a premium packet is paid to the government, according to the industry lobby group. Mathematically, that means manufacturers can increase their prices by 5 per cent without pushing the total packet price up by much more than 1 per cent.

For example, in the first quarter BATS reported a particularly disappointing 3.6 per cent decline in volumes, led by shrinking markets in Brazil, Russia and Vietnam. Yet revenues at constant exchange rates rose 1.7 per cent, "driven by strong pricing, in part due to price increases in high-inflation markets".

There is a parallel here with the big brewers, notably SABMiller(SAB). Investors need not be too concerned by flat volumes, because consumers pay up for beer in the same way they pay up for cigarettes. SAB's lager volumes showed no underlying growth in the year to 31 March, but the company still delivered organic top-line growth of 5 per cent.

2.   The second key strategy for countering industry decline is consolidation. The most recent mega deal is the acquisition of Lorillard, the number three cigarette group in the US, by Reynolds, the number two. To placate the anti-trust authorities, the companies agreed to sell various brands to Imperial Tobacco, the number four, for $7.1bn (£4.7bn). The regulator finally blessed this ménage à trois last month, although the deal has yet to formally complete. Lower-profile 'bolt-on' acquisitions are more common. BATS this week announced the purchase of TDR, the market leader in Croatia and a player in other Balkan states, for €550m (£395m).

Such deals are a vehicle for cost-cutting, which boosts profits even if top-line growth is sluggish. Imperial Tobacco in particular has a strong track record for extracting value from deals. Thanks to a seemingly endless programme of cost savings - aided by advertising bans - the operating margin in its tobacco business reached an astonishing 44 per cent in the six months to March.

3.   Finally, cigarette companies have been buying into new technology: cigarette alternatives. In 2013 BATS launched the UK's first e-cigarette brand, Vype, while the Reynolds-Lorillard merger will bring Imperial Tobacco blu, a rival brand. Here the parallel is with the oil majors and their flirtations with clean energy. This month the key European players tried to stress their green credentials by writing a high-profile open letter to the UN in support of a carbon-pricing system.

Cigarette and oil alternatives make headlines and allow producers to brag about corporate social responsibility and growth. But they are a very, very long way from paying for the dividends that have long underpinned the investment case for Britain's largest companies. Fortunately, the lesson of big tobacco is that decline can be managed successfully for much longer than one might think.

 By Stephen Wilmot , 03 June 2015

http://www.investorschronicle.co.uk/2015/06/03/comment/chronic-investor-blog/investing-in-decline-g0QBVswahNlGhiO1XtymXK/article.html

Beaten-Down Stocks in Europe May Provide a Great Source of Income

by Jason Jenkins, Investment U Research

Friday, September 14, 2012

Time to Look for Opportunities

You should always be looking for opportunities where others are avoiding. It should be the contrarian in you. Every security in Europe isn’t bad just because Europe’s political theater is dysfunctional. Just like many money managers out there, you want to try to maintain a diversified global portfolio. And that being the case, there are a lot of beaten-down European stocks out there.

But, as always, you have to be smart. Some stocks have been knocked around because they deserve to be. But you can get a little hedge against volatility through looking for shares of cheap European companies that are going to give you a regular dividend. They are out there.

First Focus on Dividend-Paying Multi-Nationals

Last week, MarketWatch quoted Weyman Gong, a principal at Signature, a wealth management firm in Norfolk, Virginia: “This dividend-paying stock segment is the most stable in the market.” Gong has stated that he’s staying put with what’s in his portfolio now.

These are companies in Europe with a broad international influence. Some of his portfolio members listed in the United States are:

• British American Tobacco PLC (NYSE: BTI)
• Philip Morris International Inc. (NYSE: PM)
• Nestle SA (OTC: NSRGY.PK)
• Unilever PLC (NYSE: UL)

But Also Consider the Risks…

Julian Pendock, Chief Investment Officer at London-based Senhouse Capital, states, “Dividends in Europe are more attractive than elsewhere, but should be given higher levels of risk and uncertainty going forward because markets are all driven by politicians and central bankers. There are some excellent higher-yield companies around, but one has to be discerning about risk.”

Will James, a European-stock fund manager at Standard Life Investment based in Edinburgh, believes that the doom and gloom predictions are a bit over the top. He went on to say that, “It’s not as bad as the headlines suggest. You have companies across Europe that have very strong balance sheets and don’t have to go to the debt markets.”

James noted that many companies have posted meaningful dividend hikes and plan to continue dividend growth payout. They include such companies as:

• Oesterreichische Post AG (OTC: OERCF.PK), which handles the mail in Austria. Currently, it’s yielding 7%. James expects the dividend to grow about 5% every year.

• Eni SpA (NYSE: E) is an Italian multinational oil and gas company that Matt Carr has written about for Investment U before. It has already made the announcement that it will increase its dividend to keep in line with inflation. The last boost was about a 3.5% increase and it’s currently sporting a 6% dividend.

James also stated that it isn’t so bad to go after companies with lower yields if you follow an investing strategy kind of like Warren Buffett’s “moat” strategy.

He believes it’s worth the trade-off if it’s a strong franchise, the industry is difficult to enter, and the company possesses a virtual monopoly or control of a limited market. All this gives the company a steady cash flow.

The example he provided was Novo Nordisk A/S (NYSE:NVO). It’s a Denmark-based health care company that produces diabetes care equipment and medications. It also focuses on other areas, such as hemostasis management, growth hormone therapy and hormone replacement therapy.

The company has increased its dividend 40% in a year. And Novo Nordisk AS has been consistent with its dividend increases. The dividend has been increased yearly since its IPO 11 years ago.

James concluded by saying, “If I can get a 4% dividend yield from that company and it will be here in four years’ time, I’m going to get a fairly attractive total return.”

If you do your due diligence, I think you can find income bargains almost anywhere throughout Europe. Stay tuned as our experts share their most profitable findings…

http://www.investmentu.com/2012/September/beaten-euro-stocks-income.html

Industry: Tobacco

BATS



ADR BTI





IMT



ADR ITYBY





JTINTER







BAATABAK



PM

BAT - Return on Retained Earnings

BAT
Year		DPS		EPS		Retained EPS
2002		201		232	a	31
2003		298		266		-32
2004		247		283		36
2005		216		208		-8
2006		275		252		-23
2007		329		256		-73
2008		263		284		21
2009		250		262		12
2010		239		256		17
2011		276		252	b (P)	-24
2012
Total		2594	c	2551	d	-43e
From	2002	to	2011
EPS increase (sen)			b-a	20.0
DPO			c/d	102%
Return on retained earnings			(b-a)/e	-47%
(Figures are in sens)

A UK Blue-Chip Starter Portfolio

Company	Industry	Share Price (Pence)	P/E	Yield (%)
HSBC	Financials	561	9.0	5.2
Royal Dutch Shell	Oil & Gas	2,225	7.6	5.0
BHP Billiton (LSE: BLT.L  )	Basic Materials	1,806	7.6	4.3
British American Tobacco	Consumer Goods	3,242	14.6	4.5
Tesco (LSE: TSCO.L  )	Consumer Services	310	8.8	5.0
GlaxoSmithKline	Health Care	1,447	11.4	5.3
Vodafone (LSE: VOD.L  )	Telecommunications	179	10.9	7.4
Rolls-Royce	Industrials	858	14.2	2.4
National Grid	Utilities	676	12.4	6.1
ARM Holdings	Technology	506	32.2	0.9

Excluding tech share ARM, the companies have an average P/E of 10.7 and an average yield of 5.0%. The numbers were 9.8 and 5.2%, respectively, when I last carried out this exercise in October 2011.

So, the group is rated a bit more highly today than it was nine months ago. However, I think it still veers towards the value end of the spectrum, because my rule of thumb for this group of nine is that an average P/E below 10 is firmly in "good value" territory, while a P/E above 14 starts to move toward expensive.

http://www.fool.com/investing/international/2012/07/04/a-blue-chip-starter-portfolio.aspx

From profits, come dividends. And from dividends, come investors' incomes.

When looking at companies such as British American Tobacco (LSE: BATS),GlaxoSmithKline (LSE: GSK), SSE (LSE: SSE) and Diageo (LSE: DGE), the market is looking at the incoming stream, but placing insufficient value on its dependability.

Better still, the market tends to mis-price such companies, seeing them as dull dividend machines, when it should be valuing them as dull, safe dividend machines.

Sage perspective

Warren Buffett, of course, is another investor with an eye for such businesses. If his well-known "economic moat" isn't another way of saying "businesses with high long-run sustainable profitability" then I don't know what is.

http://www.fool.co.uk/news/investing/2012/06/12/profits-for-the-long-run.aspx

5 Stocks With Staying Power

By Motley Fool Staff July 3, 2012

Some press comments I read over the weekend suggested -- gasp! -- that readers ought to think about putting money in the stock market. Over the long term, ran the logic, the market looked set to outperform bank accounts, mattresses, gilts, and property.

Such sentiments aren't novel, of course. Just the other day, I pointed out three reasons to buy into the market today. But such a stance does pose an obvious question, especially for the novice investor.

Namely, which shares offer long-term staying power?

Go the distanceSo here, I offer up five stocks for the long haul: five decent businesses, with decent Warren Buffett-style "moats," decent histories of long-term dividend growth -- and very reasonable prices.

Better still, they're all large-cap companies, thereby offering robustness and resilience against the inevitable uncertainties that lie in the future. Three, in fact, are in the top 10 FTSE 100 stocks -- and all five of them make the top 20.

And I make no apology for another feature that they all share: a high exposure to consumer non-discretionary expenditure. With the consumer contributing about 65% to GDP, stocks reliant on captive consumer expenditure provide a good buffer of insurance against the business cycle.

But before diving into the financials, let's start with a quick "pen picture" of each company.

Five for the futureFirst up is GlaxoSmithKline (LSE: GSK.L  ) , which employs around 97,000 people in more than 100 countries. Every minute, apparently, more than 1,100 prescriptions are written for GlaxoSmithKline pharmaceutical products. Almost as attractive is its strong range of consumer-friendly brands: Ribena, Horlicks, Lucozade, Aquafresh, Sensodyne, and the Macleans range of toothpaste, mouthwash and toothbrushes.

Next comes Vodafone (LSE: VOD.L  ) , the world's second‑largest mobile telecommunications company measured by both subscribers and 2011 revenues, which has 390 million customers, employs more than 83,000 people, and operates in more than 30 countries across five continents.

Third comes British American Tobacco (LSE: BATS.L  ) , the world's second-largest quoted tobacco group by global market share, possessing 200 brands sold in around 180markets, and with 46 cigarette factories in 39 countries manufacturing the cigarettes chosen by one in eight of the world's 1 billion adult smokers.

Fourth, we have Unilever (LSE: ULVR.L  ) , which employs 167,000 people, sells its products in 180 countries, and has a clutch of best-selling brands as diverse as Flora, Dove, PG Tips, Marmite, Persil, Knorr, Ben & Jerry's and Colman's.

Lastly, consider 500,000-employee Tesco (LSE: TSCO.L  ) , which is the world's third-largest international retailer, with fully a third of its sales coming from overseas, and spread over 13 countries. Throw in innovative home shopping, finance, and telecommunications offerings, and Tesco is more than just another grocer.

Let's see the numbersThose are the five businesses. Each, clearly, is large and diversified, with a solid consumer-centric go-to-market proposition.

But how do the finances stack up? Let's take a look. The table gives the lowdown.

Company	Share Price (Pence)	Market Cap (Pounds)	Forecasted P/E	Forecasted Yield
GlaxoSmithKline	1,458	73.7 billion	11.9	5.1%
Vodafone	178	87.7 billion	11	7.2%
British American Tobacco	3,265	63.8 billion	15.5	4.2%
Unilever	2,148	60.6 billion	16.4	3.7%
Tesco	313	25.1 billion	8.9	4.9%

Now, it's fair to say that not all of these shares tick the usual "screamingly cheap" boxes. All but one is rated at above the FTSE 100's average price-to-earnings ratio, for instance -- although generally not hugely above it. That said, all but one offers yields that are above the FTSE 100's average.

But in any case, for the most part these aren't shares selected because adversity has temporarily driven down their prices: These are shares chosen to be solid picks over the long term.

In short, they're buy-and-forget shares that will deliver a decent total return stretching into the future. And on that basis, it's a matter of "price is what you pay, staying power is what you get."\

http://www.fool.com/investing/international/2012/07/03/5-stocks-with-staying-power.aspx

Investor's Checklist: Consumer Services

Most consumer services concepts fail in the long run, so any investment in a company in the speculative or aggressive growth stage of the business life cycle needs to be monitored more closely than the average stock investment.

Beware of stocks that have already priced in lofty growth expectations.  You can make money if you get in early enough, but you can also lose your shirt on the stock's rapid downslide.

The sector is rife with low switching costs.  Companies that establish store loyalty or store dependence are very attractive.  Tiffany's is a good example; it faces limited competition in the retail jewelery market.

Make sure to compare inventory and payables turns to determine which retailers are superior operators.  Companies that know what their customers want and how to exploit their negotiating power are more likely to make solid bets in the sector.

Keep an eye on those off-balance sheet obligations.   Many retailers have little or no debt on the books, but their overall financial health might not be that good.

Look for a buying opportunity when a solid company releases poor monthly or quarterly sales numbers.  Many investors overreact to one month's worth of bad same-store sales results, and the reason might just be bad weather or an overly difficult comparison to the prior-year period.  Focus on the fundamentals of the business and not the emotion of the stock.

Companies also tend to move in tandem when news comes out about the economy.  Look for a chance to pick up shares of a great retailer when the entire sector falls - keep that watch list handy.  


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey


Read also:
Investor's Checklist: A Guided Tour of the Market...

BAT Malaysia to double cigarette exports

BAT Malaysia to double cigarette exports
Published: 2011/04/19

British American Tobacco (Malaysia) Bhd, the country’s biggest cigarette-maker, will double exports this year, Managing Director William Toh told reporters in Petaling Jaya, near Kuala Lumpur today.

The Selangor-based company will start sales to Japan and Australasia, Toh said.

Illicit cigarettes remain a threat to operations in the first quarter, he said. - Bloomberg



Read more: BAT Malaysia to double cigarette exports http://www.btimes.com.my/Current_News/BTIMES/articles/20110419143942/Article/index_html#ixzz1JyqKTC1i

Tobacco and breweries may get a blow from Budget 2011

Tobacco and breweries may get a blow from Budget 2011

Written by Financial Daily
Thursday, 30 September 2010 11:37

Tobacco and brewery sectors
Maintain neutral on both: The tobacco and brewery industries are referred to by some as the “sin sector” (together with the gaming industry) in Malaysia. Like most parts of the world, these sectors are governed by tough government regulations and pay high excise duties. Our findings, which we elaborate in this report, are mainly focused on excise duty related to the sin sector.

Tobacco: From our recent channel checks, we sense that there is a possibility of cigarette pack prices being increased by about 30 sen to 60 sen per pack. This translates into a price increment of 1.5 sen to 3 sen per stick. Benchmarking against a premium 20s cigarette pack at RM9.30 (note that small 14s packs are no longer available), this could translate into pack prices potentially ranging from RM9.60 to RM9.90.

Although we did not manage to unearth the actual sum of the hike in tobacco excise duty, historically price increases have often involved a mark-up of 0.5 sen to 1 sen per stick above existing excise duty rates.

As such, the excise duty on cigarettes may go up by 1 sen to 2.5 sen per stick. All in all, we understand that the upward price adjustment in response to the excise duty rate hike will not breach the psychological level of RM10 per pack.

Brewery: We initially expected alcohol excise duties to be spared from a raise in the upcoming Budget 2011. However, the minister’s remarks about a possible hike in alcohol excise duty would be negative for the sector. Although we are unable to gauge the amount of increase, we deem any hike from the current RM7.40 per litre level as “damaging”. As a relative measure, alcohol-related duties and taxes account for some 48% of the retail price of beer. Adjusting for disposable income, alcoholic beverage prices in Malaysia may well be considered the highest in the world.

We see the companies in our “sin sector” coverage being slapped by higher excise duties in Budget 2011.

For the tobacco sector, although we do not make any changes to our earnings for now, we downgrade British American Tobacco (M) Bhd (target price: RM40.12) to a “sell” from “neutral” previously, given that its stock price has rallied strongly in the past quarter, while keeping JT International Bhd as a “buy” (TP:RM5.96) for its solid fundamentals, which will see it strongly positioned in the value-for-money cigarette segment, which is fast gaining popularity.

Brewers enjoyed a grace period from 2006 to 2009, when they were spared from hikes in alcohol excise duty.

However, the honeymoon seems to be over and we see an impending hike in Budget 2011 likely to scald sentiment.

We maintain our “neutral” recommendation for Guinness Anchor Bhd (TP: RM7.90) and our “buy” recommendation on Carlsberg Brewery Malaysia Bhd (TP: RM5.80). — OSK Invesment Research

This article appeared in The Edge Financial Daily, September 30, 2010.

BAT’s dividends in jeopardy

BAT’s dividends in jeopardy
Tags: BAT

Written by The Edge Financial Daily
Monday, 23 November 2009 11:12

BRITISH AMERICAN TOBACCO (M) [] Bhd (Nov 20, RM44.76)
Maintain hold at RM45.08, target price RM42.50: BAT’s nine-month (9MFY09) net profit of RM573.9 million came in just within our expectations and consensus, constituting 70% of both our FY09 net profit forecast and street estimates. A second interim dividend per share (DPS) of 61 sen tax-exempt was below our expectation.

Double-digit volume contraction continues as illicit trade reaches all-time high of 38.7%. BAT’s 9MFY09 sales volumes contracted by 17.3% year-on-year (y-o-y), steeper than total industry volume (TIV) shrinkage of 14.6% and is the third consecutive quarter that BAT’s volume has decreased more than the TIV’s.

This was due to the acceleration in consumers’ downtrading in response to tough economic conditions and timing of pre-budget trade loading by retailers and distributors.

Lower sales volumes, particularly in the value segment, caused revenue to decrease by 7% y-o-y. Pall Mall’s retail audit market share slid to 7.8% (-0.6% y-o-y) as consumers bypassed value and extremely low-priced cigarettes (ELPC) for illegal cigarettes. BAT premium brands Dunhill and Kent however both grew market share in 9MFY09 by 1.7%.

The timing of marketing expense and higher finance cost saw 3QFY09 pre-tax profit decrease by 13% q-o-q, steeper than the 6% dip in revenue. Higher advertising and promotion expense for the launch of new compact cigarette product Kent Nanotek, consolidation of distribution network and higher finance cost (for the borrowings overlap as RM150 million medium term notes matured on Nov 2, 2009) caused the decline in pre-tax profit.

3QFY09 net profit slid further by 17% q-o-q, due to a 3% increase in tax rate due to the non-deductibility of interest expense from BAT’s move to single-tier tax system and a one-off adjustment for shortfall in dividend franking credits due to tax refunds.

Dividends are at risk, with the second interim DPS of 61 sen being 20% lower than 3QFY08’s 76 sen. While BAT will continue to pay out at least 90% of net profit in dividends, the practice of increasing absolute DPS y-o-y is under review. We have lowered FY09 net DPS estimate to RM2.53 (compared to FY08’s RM2.65). That translates to FY09 dividend yield of 6%.

We have revised FY09 and FY10 net profit forecast downwards by 2% and 3% respectively. We have raised our FY09 BAT volume contraction assumption to -10% (from -5%).

We maintain a hold recommendation with lower target price of RM42.50 predicated on a discounted cash flow (DCF) valuation with the weighted average cost of capital (WACC) at 6.3% and terminal growth rate of 2% from RM45 previously. — Kenanga Research, Nov 20





This article appeared in The Edge Financial Daily, November 23, 2009