British American Tobacco’s strategy not broken, but sharper execution required

British American Tobacco (BATS), owner of Dunhill, Kent and Lucky Strike, has released a trading update ahead of its half-year results.

Group cigarette volume share up 0.1 percentage points and value share down 0.4 percentage points, mainly due to a weak performance in the US.

Full year guidance unchanged – targeting 3-5% organic constant currency revenue growth and mid-single digit adjusted earnings per share growth.

Strategy unchanged under new CEO Tadeu Marroco but in need of refinement.

Charlie Huggins, Manager of the Quality Shares Portfolio at Wealth Club said, “It is hard to describe BATS’ future as anything other than highly uncertain. Its high margin, core combustibles business is in steady decline, with scope for that decline to accelerate as the shift to reduced risk Next Generation Products (NGPs) gathers pace.

“And while BATS has made progress with its transition to NGPs, it still has a long way to go to convince investors that the margins and returns can come close to combustibles.

Adding to the uncertainty for investors is the surprise departure of Jack Bowles as CEO last month. A change of CEO isn’t normally a sign of a strategy going swimmingly well.

Given all these uncertainties this trading update from BATS is somewhat reassuring. Full year guidance has been maintained and according to new CEO, Tadeu Marroco the strategy isn’t broken, it just needs refining with ‘sharper execution and greater emphasis on fewer, bigger priorities’.

One of Tadeu Marroco’s first priorities will be to improve performance in U.S. combustibles, which has been ‘disappointing’. BATS’ heated tobacco product, glo is also underperforming while a nod to raising ethical standards suggests cultural change is also on the cards.

The share price performance of BATS in recent years has been nothing short of dire. But fundamentally, BATS is still a hugely cash generative business, with the firepower to invest in the NGP transition, whilst returning cash to shareholders. If the new CEO can accelerate that transition, whilst keeping the cash flowing into shareholder’s coffers, there is scope for a recovery in sentiment.”