Our opinion on the current state of BTI

British American Tobacco (BTI) identifies itself as a "leading consumer goods company," a nuanced way of indicating its role as a major global producer and seller of cigarettes and related products. It ranks as the second-largest entity on the Johannesburg Stock Exchange (JSE), trailing only behind Naspers. In recent years, the cigarette industry has faced increasing scrutiny and regulation. Restrictions on advertising and packaging, along with the broader public perception of exploiting harmful addictions, have significantly impacted these companies, frequently embroiling them in legal battles over health-related damages.

BAT is the proprietor of numerous well-known cigarette brands, including Camel, Peter Stuyvesant, Rothmans, Benson & Hedges, Dunhill, Pall Mall, Kent, and Lucky Strike. In a bid to mitigate the adverse perceptions associated with cigarettes, BAT has ventured into "new category" products like vaping and electronic cigarettes, seeing these as avenues for sustainable growth. However, these products have recently faced their own health-related controversies in the United States, affecting sales.

Despite the ethical concerns surrounding its operations, BAT presents certain investment appeals. With approximately 20% of the global population still smoking, BAT operates within a vast market. Overlooking the moral implications of its business, the company's shares appear to offer substantial value at present. Interestingly, the company has seen a degree of resilience or even benefit from the COVID-19 pandemic, with the CEO targeting a doubling of non-combustible product sales by the 2023/24 fiscal year. South Africa's illegal cigarette market, considered the largest globally by BAT, represents another significant aspect of its operational context.

On 6th December 2023, Business Day disclosed that BAT had recorded a GBP25 billion (R595 billion) impairment on its US operations, causing a 10% fall in its share price. For the year ending 31st December 2023, the company reported a slight revenue decline of 1.3% and a diluted loss per share of 646.6 pence. However, it highlighted robust growth in "New Category" revenue, driven by Vuse and Velo brands, with non-combustibles now constituting 16.5% of group revenue, marking a 170 basis point increase from FY22. Given these dynamics, and with a P:E ratio of 6.92, the shares of BAT currently seem undervalued.