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BAT : Q1 results
British American Tobacco’s first quarter (to March 2005) turnover and operating profits (pre exceptionals) were down 20% to £2.1bn and down 4.4% to £582m respectively. This fall is a result of a change in group structure. BAT disposed of the distribution business of its Italian subsidiary and combined BAT’s US businesses with R.J. Reynolds (and now accounts for it as an associate). BAT’s US subsidiary generated 12.8% of revenue and 10.7% of operating profit in the previous quarter. The distribution business generated 8.4% of the corresponding quarter’s revenue, but only 1.6% of the operating profit (i.e. low margins business). Hence, the steep 20% fall in revenue is not as bad as it looks.
BAT said that LFL operating profit was up 6%, but gave no sales numbers. Operating profit including the contribution from associates was up 5.7% to £670m. BAT gives considerable prominence in the results announcement to the EPS growth, which was up 26%. EPS benefited from a 15.7% reduction in taxation, favourable adjustments to the value of derivatives resulting from international accounting standards and a lower minority interest; hence EPS growth of 26% was greater than the 5.7% growth in profits.
Profit growth was driven by all regions, except in the American Pacific region. This region generated 15% of the operating profit (excluding the contribution from associates) in the first quarter, but generated 31% of the operating profit in the corresponding period. The difference is due to the merger of BAT’s US subsidiary with R.J. Reynolds. However, even after excluding the US business, profits generated by this region was down £35m due to down trading in Canada and Japan. All the other regions performed well.
BAT’s four global “drive” brands increased by 2%, but growth was not-even across all brands. Kent volumes were up 19% and Pall Mall volumes were up 6%. However, Dunhill volumes fell by 11% which BAT attributes to an increase in duty in South Korea; Lucky Strike volumes were down 5% “reflected overall industry volume declines in key markets”
As expected, duty increases and bans reduced cigarette market in most countries. In Italy the introduction of ban on indoor public smoking, meant that the market was down 12%. Increases in prices (such as in Germany and France), better sales mix (in Russia, France, Germany) and increases in market share increased profits in most regions; with the exception of the American Pacific region where the sales mix deteriorated.
BAT’s share trades at a prospective PE of 12.4× (at 999p) and has a 4.5% yield. The PE is the lowest in the sector; the yield is the highest in the sector. The rating reflects growth drivers, with a larger portion of Imperial Tobacco’s and Gallaher’s profit driven by sales rather than cost cuts.
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