Put that in your pipe and smoke it

BAT will hope­fully pay its pound of flesh

Finweek English Edition - - Insight -

BRI­TISH AMER­I­CAN TO­BACCO (BAT, code BTI) will be an­nounc­ing an ex­cel­lent profit for the nine months to Septem­ber at the end of this month. That should im­prove the poor per­for­mance of its share price over the past six months, es­pe­cially as mea­sured in rand terms on the JSE. Since the JSE list­ing of the share in Oc­to­ber 2008, in­vestors in BAT have felt like poor re­la­tions rather than the mil­lion­aires the com­pany made ev­ery year when it was still part of the Rem­brandt group.

BAT an­nounced at end-July its profit per share for the six months to June rose by 24% – from 62,48p to 72,23p. Nat­u­rally, that’s mea­sured in ster­ling, which is los­ing value very rapidly. For the nine months to Septem­ber 2008, BAT earned 95,40p/ share, 16% more than the 87,67p for the cor­re­spond­ing pe­riod to 30 June 2007. But that was be­fore ster­ling weak­ened and it was still worth some­thing in rand.

An­a­lysts pre­dict BAT’s profit for the nine months to Septem­ber could be as much as 114p/share. That’s al­most near­ing the 123,28p/share earned for the full 2008.

That good profit is ap­par­ently still not good enough for prospec­tive in­vestors and at R232/share af­ter 12 months on the JSE, BAT is cer­tainly the dis­ap­point­ment of the year. But in­vestors should learn to look slightly fur­ther than the cur­rent weak ster­ling. In his sur­vey of the fi­nan­cial year to 31 March, Reinet chair­man Jo­hann Ru­pert – whose as­sets con­sist largely of an in­vest­ment in BAT – said: “BAT is a global com­pany that earns nearly all its cash flow and profit out­side the United King­dom. The weak­en­ing of the pound should there­fore in due course con­trib­ute to greater prof­itabil­ity, which should then be re­flected in the share price again.”

Ru­pert is right, and ex­ist­ing – and es­pe­cially prospec­tive in­vestors – would do well to use the op­por­tu­nity to in­crease their ex­po­sure to BAT slightly be­fore the an­nounce­ment at end-Oc­to­ber. Earn­ings per share for the nine months to Septem­ber could eas­ily be as much as 125p/ share and for the full 2009 could even ap­proach 155p/share, or 25% more than 2008’s 123,28p.

BAT de­clared a fi­nal div­i­dend of 61,6p

in 2008. At the then ex­change rate of more than £1/R14 that was worth 882c to South African share­hold­ers. It’s not un­likely BAT could de­clare a fi­nal div­i­dend of 77p/share, or per­haps even 80p/share, this year.

Even at the cur­rent weak ex­change rate of less than £1/R12, lo­cal share­hold­ers would re­ceive a fi­nal div­i­dend of at least 883c. Along with the in­terim div­i­dend of 361c (27,9p) paid ear­lier this year, that’s a cash in­come of 1250c/share for SA in­vestors. That means a tax-free cash re­turn of 5,3% – not bad for a world-class com­pany whose shares are avail­able on your doorstep.

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