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Reynolds acquisition flatters BATS results

The acquisition of US business Reynolds gave sales a boost over 2017, while the focus continues to shift away from cigarettes towards alternative products
Reynolds acquisition flatters BATS results

The £41.8bn purchase of Reynolds America by British American Tobacco (BATS) was the largest ever acquisition of a tobacco company, and one of the biggest M&A deals in history. The deal completed last July, so it’s no wonder that full-year results look abnormally inflated. Reported cigarette sales volumes, which have been in steady decline in recent years, were up 3.2 per cent to 686bn, but strip out Reynolds’ contribution and volumes fell 2.6 per cent. It was a similar story with sales. Group revenue increased by 38 per cent, or a mere 2.9 per cent after Reynolds and foreign exchange benefits are removed.

There’s no doubt that the Reynolds deal flattered these results, but the BATS business is still performing well at its core. Its “global drive brands” of cigarettes increased market share by 40 basis points, and saw a 7.6 per cent uptick in organic volumes. But the main focus has turned to next-generation products such as vaporisers. Sales from these alternative products yielded £397m in 2017, and are expected to more than double to £1bn during the current financial year and to £5bn by 2022.

Analysts expect EPS of 1,671p in the year to December 2018 based on Bloomberg consensus, up from 1,479p in 2017.

BRITISH AMERICAN TOBACCO (BATS) 
ORD PRICE:4,249pMARKET VALUE:£ 97.5bn
TOUCH:4,248.5-4,249p12-MONTH HIGH:5,643pLOW: 4,194p
DIVIDEND YIELD:4.6%PE RATIO:2
NET ASSET VALUE:2,651p*NET DEBT:75%
Year to 31 DecTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201315.35.80205142
201414.04.85167148
201513.15.86231154
201614.86.25250169
201720.329.61836195
% change+38+374+634+15
Ex-div:22 Mar   
Payment:09 May   
*Includes intangible assets of £118bn or 5,135p a share