The British American Tobacco (BAT) share price has undergone a decent rebound from its March lows, but on a longer-term basis it still remains well below the levels it was over three years ago, when it was up at the heady heights of 5,600p a share.

BAT share price under pressure

The last three years have been difficult ones for big tobacco, hit by regulatory crackdowns and advertising bans on its traditional tobacco products, the industry switched focus on to e-cigarettes and vaping products. As a result, BAT's share price slid sharply in the wake of the global crackdown on cigarettes advertising, as well as the recent lockdowns.

It was hoped that the growing popularity of vaping products and e-cigarettes would offset declining sales of its tobacco products, and it was starting to work, until reports out of the US suggested a link between vaping, e-cigarettes and respiratory illnesses in the 18-35 cohort, which resulted in a number of premature deaths.

Revenue target pushed back on saftey concerns

This resulted in temporary bans in a number of US states as investigations began into the safety or otherwise of vaping products, however this appears to have only had a modest effect on the growth in its new categories business, and the demand for combustible products like glo neosticks. The growth here has seen revenue more than double to £1.2bn, however it has had the effect of prompting management to push back on reaching its £5bn revenue target by one year to 2025.  

In an update in April, the company said it was on course for a decent start to the year and also reaffirmed its 65% dividend payout policy, which in the current environment, where dividends are being cut left and right, can be construed as a good thing. This dividend policy was reaffirmed in today’s first-half trading update, however even here revenue performance has been affected by the coronavirus disruption of the last few weeks.  

Lockdowns force revenue growth downgrade

Concerns about this did prompt management to warn earlier this year that the we could see some weakness in the first half due to supply chain disruption caused by Covid-19, but that they still expected to show revenue growth at the lower end of the 3% to 5% range. This morning’s update has forced a change to that guidance with a downgrade to 1% to 3% range, as the impact of coronavirus and lockdowns adversely affected its emerging market business more than expected. Weakness in Bangladesh, Vietnam and Malaysia was particularly pronounced, while the lockdown measures in Argentina and Mexico also acted as a drag. The ban on tobacco sales in South Africa also remained in place.

As a result of these factors, BAT said it expected product volumes to decline around 7% in 2020, a downgrade from the previous 5%, due to the continuation of the Covid-19 lockdowns in Argentina and Mexico, and the problems in South Africa. On the plus side, digital sales in its new categories division has seen decent volume sales of glo products in the Japanese market. Volumes here have been rising rapidly, with soft launches in Italy, Romania, Russia and Spain showing early promise.