Home Estate Planning BAT braces for shift to vaping amid tough US market

BAT braces for shift to vaping amid tough US market

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Lucky Strike owner British American Tobacco (BAT) is due to report its full year results on Thursday amid a switch to non-combustible products such as vapes.

BAT is bracing for low single digit revenue growth in its full year, between three and five per cent, as it grapples with a difficult US market where illicit disposable vapes have surged.

The analyst consensus for 2023 is £27.6bn in total revenue, with £3.46bn of that from ‘new categories’— up from almost £2.9bn the previous year. BAT achieved revenue of £27.65bn in 2022.

Last week, the UK government announced a ban on disposable vapes to curb the rise of vaping among young people.

The new policy is unlikely to directly hit traditional tobacco manufacturers though, according to Owen Bennett, a global tobacco analyst at investment bank Jefferies. He said increased regulation will be a good thing for the tobacco giants because it will drive out cheaper, disposable brands. 

Currently, oral nicotine pouches, tobacco heating products and vapes only make up around 16.6 per cent of total group revenue for BAT, although it is aiming to generate half of its revenue from non-combustibles by 2035.

In December, BAT said it expects to hit break-even on its ‘new categories’ such as heated tobacco and vapes, a year ahead of schedule.

But the company’s shares plummeted as it told the market that the company will take a £25bn hit as it writes down the value of some of its US cigarette brands due to “macroeconomic headwinds”.

The illegal disposable vapes, thought to come from China, are stealing market share and worsening the challenges for authorised sellers like BAT and Imperial Brands, which are also facing a steady decline in traditional cigarette demand.

Over the past year, the stock has fallen around 24 per cent.

“Smokers continue to switch to next generation products including vaping and that has prompted British American Tobacco to take a long-term view about the value of its assets in the combustibles category,” explained AJ Bell investment director Russ Mould.

“While it pays a generous dividend, investors are likely to be questioning their commitment to the stock given the poor share price performance and the fact the sector is facing increasing regulatory and political headwinds,” Mould added.

BAT has said it will provide more details on its strategic direction next week.

On Friday, BAT and Philip Morris International said they had reached a resolution on long running patent disputes over their cigarette alternatives technology.  

The agreement, which lasts eight years, has ended the ongoing litigation and prevents future claims against current products.

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