British American Tobacco receive profit boost from e-cigarette sales

Rising sales of e-cigarettes and vapes have more than offset dips in traditional tobacco sales in recent years, as the company saw sales in these products rise by 27% to £531m.

British American Tobacco (BAT) stated that they believed this trend would continue next year and see growth happening up to 50%.

The company produces Dunhill and Lucky Strike cigarettes has looked into the alternatives to their traditional products in recent years, as the number of people who regularly smoke continues to fall.

Half year numbers from British American Tobacco showed a robust financial performance and increased traction for the group’s Potentially Reduced Risk Products.

The shares edged higher on the news. The group’s focus on its strategic portfolio of key brands paid off, with their revenues rising by 6.6%, before the benefit of currency moves. Overall, the group’s underlying sales rose by 4.1%.  Operating profits rose by 5.9% to £5.1bn.

Cigarette volumes declined by 3.7% in total, but the Strategic Products portfolio limited declines to just 0.8%. BATs pushed through pricing increases to drive income ahead, despite those lower volumes.

The new generation of potentially reduced-risk products saw strong growth, with Vapour sales up 58%. Tobacco Heating Products were surprisingly sluggish within the mix though, edging their underlying revenues just 4% ahead. All in all, the results were a fraction ahead of City forecasts. US cigarette volumes were 6% lower, as more consumers switch over to newer, possibly safer forms of tobacco.

Jack Bowles, Chief Executive said: “We continue to deliver on our financial objectives with adjusted revenue and adjusted profit from operations in line with our guidance, driven by a continued strong financial performance in combustibles.

“Our New Categories portfolio continued to deliver encouraging growth. While there is much more to be done, with new product launches planned for the second half of the year and the impact of a full year of additional investment, we expect revenue growth to accelerate in the second half of the year. In 2019, we are on track to be around the middle of our guidance range of 30-50% New Categories revenue growth per annum, excluding the impact of translational foreign exchange.

“As we create a stronger, faster, more agile organisation and deliver enhanced value growth from our combustibles business, our adjusted operating margin grew 110 basis points (bps), alongside the significant increase in investment in New Categories. We continue to generate cash and we maintain our guidance of deleveraging by 0.4 times, excluding the effect of currency movements on our reported results.

“We are on track to deliver another good financial performance in 2019, including high single figure adjusted earnings growth, at constant rates of exchange.”

Industry reaction

Commenting on the numbers, Steve Clayton manager of the HL Select funds, which hold a position in BAT

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. These worries, coming just after the group leveraged itself up to buy Reynolds American, have pushed the shares lower over the last year and the dividend yield is now as high as 7%.

If the group can succeed in transforming itself into a leading global producer of lower risk products, that could secure the dividend for the longer term. In the near term however, investors will remain nervous about what the next move from the US regulatory authorities will be.