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British American Tobacco shares have fallen by a quarter over the past year as it grapples with the uncertain long-term future of its traditional cigarette business and investors push for the return of share buybacks.
The challenge facing the Camel and Lucky Strike seller from the ongoing secular decline in smoking rates was highlighted by it taking a bigger-than-expected £27.3bn impairment on acquired US cigarette brands in its annual results because of major challenges in its largest market.
Cigarette volumes fell by a painful 11 per cent in the US in 2023, where the company was hit by consumers downtrading as well as stopping smoking altogether. The spread of illegal disposable vapes also hurt volumes.
Despite this weakness, the company’s traditional business still accounted for more than four-fifths of revenue last year. Management is aiming for half of total global revenue to come from non-cigarette products by 2035. Annual revenue grew 16 per cent at the new categories division in 2023, helping it pivot to profit two years ahead of target.
Investors responded positively on results day to management’s comment that it could reduce its £15bn stake in Indian conglomerate ITC, a move which would present “the opportunity to release and reallocate some capital”. Share buybacks, a key reason that investors buy into listed cigarette merchants nowadays, were paused by the company last year as it prioritises leverage reduction.
Interim finance director Javed Iqbal sold £250,000-worth of shares on February 12, taking advantage of the uplift in the share price on the back of the results. Iqbal will stay in this role until the end of April, when Soraya Benchikh will rejoin the business and take the reins as chief financial officer.
BATS shares trade hands at seven times forward consensus earnings, according to FactSet. This is half the level of US competitor Philip Morris International’s price/earnings ratio.
Private equity boss boosts holding
The debate around private equity’s performance in a higher interest rate environment continues. Although companies continue to cite growth in the value of their investments, the big discounts to net asset values at which many listed operators’ shares trade suggest the market retains some scepticism over their abilities to crystallise the sort of gains they’ve attributed to unrealised portions of their portfolios.
KPMG’s review of the UK’s private equity industry found deal volumes fell by a fifth last year. Exits dropped to their lowest level in six years, with the firm’s corporate finance partner Richard Stark blaming “market volatility, negative economic sentiment and expectation gaps between buyers and sellers” as the reasons for the lack of activity.
Across Europe’s mid-market, exits fell to their lowest level in a decade. This has led to a “build-up of investments within portfolios, driving funds to seek alternative exit paths and deferring asset sales until more favourable market conditions emerge”, according to investment bank DC Advisory.
Both firms believe an uptick in activity is likely this year, if only because private equity fund managers are under pressure to return cash to investors.
Peter Dubens, co-founder and managing partner of European mid-market player Oakley Capital Investments, seems to think an upturn is on the way — at least for his London-based business. It recently reported a 4 per cent growth in net asset value (NAV) to 684p last year and completed two new investments — the biggest being the £90mn buyout of the Steer Automotive group of repair centres.
Despite this, Oakley’s share price has been more or less flat over the past 12 months and its shares trade at a 30 per cent discount to NAV. Dubens bought over £660,000 worth of shares last week, adding to more than £2.2mn worth of purchases made in November. He now owns 11.1 per cent of the company.
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