Finweek English Edition - - INVESTMENT -

Bri­tish Amer­i­can To­bacco (BAT) has had an ex­tra­or­di­nary run since 2008 and has po­ten­tial to test fur­ther highs in the short term. As a de­fen­sive pick, the to­bacco in­dus­try has his­tor­i­cally been re­silient in tough eco­nomic times and with in­vestors look­ing for some sta­bil­ity in a highly volatile mar­ket, BAT has def­i­nitely se­cured good gains for many of its devo­tees. With the rand ap­pear­ing to be weak in the medium term, and BAT be­ing a rand-hedge stock, we ex­pect it to de­liver con­tin­u­ous strong earn­ings in the fu­ture.

De­spite all the anti-smok­ing laws and law suits repet­i­tively thrown in their di­rec­tion, BAT has shrugged off all bad pub­lic­ity and has forged ahead. The to­bacco in­dus­try is al­ways at­tacked for its com­pa­nies’ ethics, not­with­stand­ing all the ri­valry be­tween them. This is il­lus­trated by the re­cent al­le­ga­tions made by Busi­ness Times that BAT was spy­ing on ri­vals as part of its bat­tle to thwart the R5bn il­le­gal cig­a­rette in­dus­try. BAT ap­par­ently over­stepped the mark, break­ing a num­ber of laws in South Africa and the UK. But the un­pleas­ant truth about BAT is that it sells prod­ucts that are highly ad­dic­tive. Smok­ers are reprised users and have high lev­els of brand loy­alty – mean­ing that to­bacco con­sump­tion is fairly sta­ble – mak­ing BAT a highly cash-gen­er­a­tive, de­fen­sive in­vest­ment. BAT is also vastly di­ver­si­fied, both ge­o­graph­i­cally and across its range of brands that vary from pre­mium to value cig­a­rettes, which fur­ther pro­tects its earn­ings from chang­ing eco­nomic con­di­tions. This com­pany is a ma­jor global player – only five com­peti­tors con­trol around 80% of the world’s to­bacco mar­ket.

With all the in­ter­na­tional anti-smok­ing laws in place and the strict re­stric­tions on ad­ver­tis­ing and mar­ket­ing, BAT com­mands im­mense pric­ing power to com­pen­sate for de­clin­ing sales. How­ever, with the reg­u­la­tory and le­gal is­sues that come with sell­ing a prod­uct that is harm­ful to peo­ple’s health, some coun­tries are con­sid­er­ing the adop­tion of plain pack­ag­ing to fur­ther curb de­mand. Yet BAT is still on the rise, and with a f lag pat­tern cur­rently in the mak­ing, we an­tic­i­pate fur­ther up­side in the short term. POS­SI­BLE SCE­NARIO: A move through the 64 465c/share re­sis­tance level would con­firm this bullish con­tin­u­a­tion pat­tern, and BAT would re­turn to its pre­vi­ous bull trend. But the rel­a­tive strength in­dex (RSI) must si­mul­ta­ne­ously aban­don its bear trend. The up­side tar­get of this break­out would be at 78 820c/share – achiev­able in the short term (one to six months). AL­TER­NA­TIVE SCE­NARIO: The f lag pat­tern would per­sist below 62 300c/ share. But breach­ing the lower slope would steepen the bear trend to­wards the 59 355c/share sup­port mark.

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