- Adjusted earnings growth comes up short of earlier guidance
- Further debt reduction through 2021
British American Tobacco (BATS) has revised its earnings guidance as part of a pre-close trading update for 2020. Though the group now anticipates a softer impact on sales from Covid-19 than originally anticipated, it also revealed that adjusted EPS is now expected to grow by mid-single-figure percentages, compared with earlier guidance for a high-single-figure increase.
The downward revision was partially linked to the impact of the virus on associate income, but it also reflects increased investment in its ‘new categories’ range to counter the secular decline of its traditional tobacco products in established markets. But the group did note that sales in the US held up remarkably well.
Chief executive Jack Bowles said the group “encourages those who would otherwise continue to smoke to switch completely to scientifically substantiated reduced risk alternatives”. That would have seemed an extraordinary statement from a prominent industry figure at one time, but there is a clear commercial imperative as BATS continues to grow revenue and market share in vaping and other new categories.
The group also signalled that it intends to reduce net debt as a proportion of cash profits over the coming year. Net borrowing was equivalent to 65 per cent of shareholder funds at the June half-year, so management faces a balancing act, as it seeks to minimise its financing obligations while providing a dependable income stream. Hold at 2,902p.