British American Tobacco p.l.c. BTI is slated to release preliminary results for 2018 on Feb 28. The company’s performance is gaining from robust pricing initiatives and volume growth across segments. Let’s take a closer look at the aspects that are likely to impact the upcoming results.
Factors Likely to Aid
British American has been witnessing revenue growth for a while now, courtesy of strong pricing initiatives. In fact, well-chalked pricing efforts are boosting revenues across the combustibles and potentially reduced risk products (PRRPs) categories. We note that for the six-months period ended Jun 30, 2018, the company witnessed an 8.5% rise in revenues owing to strategic pricing and strong brand performances. Going ahead, we expect pricing to be a key revenue driver for the company.
Speaking of brands, British American’s strong portfolio of cigarettes as well as PRRPs is well-positioned to drive global performance. Markedly, the company’s Global Drive Brands, consisting of banners like Dunhill, Kent and Lucky Strike, are performing well.
Also, the Next Generation Products (NGP) and Tobacco Heating Products (THP), which are included in the PRRPs segment, are performing well on consumers’ rising health consciousness and awareness regarding the harmful impacts of nicotine. Notably, revenues in the PRRPs unit surged 43.4% (on a representative basis) in the first six months of 2018, backed by substantial growth witnessed in the NGP portfolio as well as the company’s vapor products. Further, management is on track with innovation in this category. Such efforts as well as consumers’ growing enthusiasm toward low-risk tobacco alternatives are likely to drive the upcoming results.
Apart from these, British American is gaining from the acquisition of Reynolds American Inc. In fact, the buyout contributed significantly to revenues and profitability in the six-months period ended Jun 30. Further, the buyout is a key catalyst in augmenting Oral tobacco volumes.
Headwinds
Although the aforementioned factors are encouraging, there are certain headwinds in British American’s path that may drag the company’s performance. In this context, we note that foreign exchange rates are a worry. Markedly, foreign currency headwinds weighed on the company’s performance during the first six months of 2018 by nearly 8%. Management anticipates currency fluctuation to negatively impact revenues by nearly 5-6% in 2018.
Additionally, the company is witnessing declining cigarette sales volumes in the United States, mainly due to industry trade inventory declines. For 2018, cigarette industry volumes are expected to remain dismal, which is likely to dent performance. Certain other market regions of the company are exposed to sales volume volatility. Notably, lower sales volumes in the Gulf Cooperation Council (GCC), Brazil and Russia during the first six months of 2018 were a headwind. We note that performance of the GCC region has been dismal due to adverse trade inventory movements.
Nevertheless, we expect that the company’s robust pricing endeavors and growth in PRRPs will cushion the hurdles.
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