Market happy with BAT's slow burn

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BAT's business model is built on being able to counter dwindling cigarette volumes with pricing power - especially in its Global Drive Brands (GDB) such as Kent, Lucky Strike, Pall Mall, Dunhill and Rothmans.

While some market commentators have argued against investing in a shrinking tobacco market, BAT has underlined its confidence in its strategy and future financial performance by consistently increasing dividends to shareholders.

But Kagiso Asset Management analyst Dirk van Vlaanderen conceded BAT's firstquarter update was "a little light on our expectations - particularly on cigarette volumes".

He noted that the company had previously guided the market towards a stronger performance in the second half of the financial year due to the timing of price increases and the phasing of volume growth in the comparative periods.

BAT's price mix - which is the more important element of growth in the tobacco industry - was up 5.3% and looked set to accelerate through the year as price increases took effect, Van Vlaanderen said.

But he cautioned: "We remain cautious on the pricing outlook in Australia - one of BAT's key profit markets - as competitive pressure and downtrading continue to weigh on profit growth in this market."

BAT's pricing power is reflected in the increase in revenue of 1.7% at constant rates of exchange in the quarter ending in March. Revenue, though, was down 5.8% at current rates of exchange.

Total cigarette volumes fell 3.6% to 152-billion cigarettes in the March quarter compared with the matching period last year. It reported weaker markets in Brazil, Russia and Vietnam.

The company did, however, see good volume performance in South and Central Asia as well as Mexico, Bangladesh, Japan, France and Poland. It claimed strong market share growth in the quarter, with GDB cigarette volume growing 5.7%.

A brand breakdown showed Kent volume down 1.6%. Lucky Strike was 5% higher with increases in Mexico, France and Belgium more than compensating for lower volume in Japan and Italy. Pall Mall was up 2.4% as growth in Pakistan, Poland and Mexico offset weaker markets in Italy and Russia. Rothmans volumes increased 36.9%, driven by a strong performance in a number of markets (most notably Russia, Australia, Kazakhstan, Turkey and Italy).

CEO Nicandro Durante believed BAT had performed well in the first three months of the year despite a challenging trading environment.

He was confident it would deliver another year of good earnings growth at constant rates of exchange, saying performance was "significantly skewed" to the second half of the year.

Source: Business Day via I-Net Bridge