Some blue chip shares are now fight­ing back

Pretoria News - - FOCUS - Amelia Mor­gen­rood is a PSG Wealth fi­nan­cial ad­viser based in Pre­to­ria. Views are of the au­thor and not nec­es­sar­ily the gen­eral view of the en­tire PSG en­tity. BAT shares are held on be­half of clients.

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.

AMELIA MOR­GEN­ROOD

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