BAT reports resilient profits

In line with wider industry trends, volumes continued to shrink: group cigarette volumes from subsidiaries were down 3 per cent to 676bn. Western Europe, Brazil, Russia and South Africa have become tough trading markets for BAT, but stronger performances came out of more exotic emerging markets, including Bangladesh, Pakistan and Vietnam. Western Europe reported the worst volume declines – down 8 per cent – as the eurozone downturn forced chain-smoking southern Europeans to trade down to cheaper brands.

To offset falling volumes across the industry, BAT delivered improved market share - up 20 basis points. The growth can be attributed to the group’s ‘global drive brands’, including Dunhill, Pall Mall, Kent and Lucky Strike, which together mustered a 2 per cent volume improvement and now account for 35 per cent of BAT's total volumes.

Margin growth also boosted the conglomerate’s profits. Operating margins grew by 100 basis points to 38.1 per cent, helping offset foreign-currency headwinds. The weakness of the Australian dollar, Japanese yen, South African rand and Brazilian real against sterling are expected to pose another significant challenge in 2014.

Like most of its competitors, BAT has joined the race to develop safer cigarette alternatives to compete in an increasingly health-conscious world. During the year it launched Vype, making it the first global tobacco company to release a new generation e-cigarette. This will help BAT offset tougher regulatory measures, including the introduction of plain packaging laws in Australia. All these investment decisions appear to be paying off: the group's return on capital employed has improved considerably, hitting 31 per cent last year, up from 23 per cent in 2009.

Broker Panmure Gordon expects end-2014 EPS of 212p, down from 217p in 2013.