Some blue chip shares are now fighting back
THE PAST 12 months were a sad affair if you expected any return from the good old blue chip shares on the JSE. A few exceptions were Naspers gaining 20 percent, and the underdog of late, British American Tobacco (BAT), which rose by 10 percent. From its recent R500 low late in 2019, it is up almost 30 percent.
BAT has wholly lost its attraction as long-term stalwart, but the recent full-year results might swing investors’ minds again – they were reasonable considering the circumstances.
Of particular interest was the growth in combustibles which attributed more than 67 percent to revenue growth. New Categories and Traditional Oral also aided revenue growth. These more than offset the impact of the decline in total cigarettes and tobacco heating product (THP) volumes.
The US (40.2 percent of revenue) grew it by 9 percent; Americas (16.5 percent of revenue) was up 3.6 percent; Asia-Pacific (20 percent of revenue) rose by 5.6 percent; and Europe and North Africa (23.4 percent of revenue) saw a marginal growth of 0.6 percent. Net sales were up more than 6 percent thanks to an increase in Combustibles and improvements in both New Categories and Traditional Oral, which more than offset the 4.7 percent decline in traditional cigarette volumes.
The one-off stock reduction in Russia, the change in taxes in Egypt, and the challenging macro environment in Venezuela led to volume declines. Still, these were more than offset by higher volumes realised in Japan, the Middle East, South Africa, Romania, and Poland.
THP volumes increased by 31.6 percent. Strategic Cigarette and THP achieved capacity and value shares in key markets.
The adjusted operating profit was up 6.6 percent (at constant rates) thanks to the improved revenues and operational efficiencies across all categories helping to fuel the increased marketing spend behind the expansion of New Categories.
The substantial margin enhancement in the US was the primary driving force behind the half-percent increase in the group’s adjusted operating margin.
Adjusted diluted earnings per share improved by 9.1 percent in pound terms, on a constant translational foreign exchange basis, this translated to an 8.4 percent increase. The dividend was 3.6 percent higher at 210.4 pence.
Management expects the next financial year to be another good one, with 3 to 5 percent revenue growth. The revenue from the New Category is expected to rise from the current £1.26 billion (R25.71bn) to £5bn in the next four years.
They further expect continued margin growth, cash generation, and de-leveraging. Earnings per share are expected the grow by a single high figure, and the dividend payout ratio will remain at 65 percent.
The forward price/earnings ratio is currently around 9.5 times multiple versus the five-year average of 14.2 times. BAT’s earnings prospects seem to have improved, and debt levels have been reducing consistently, giving more confidence in its prospects.
While regulations are likely to impact its efforts to modernise and increase margins through new categories, it will probably be more comfortable for big tobacco players to adapt to the environment.
On an earnings basis they are trading at a 22 percent discount while it has traded in line historically.
The current valuations look attractive.