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Raised guidance gives BAT share price a lift

Tobacco stocks got smoked in April on reports that the US is considering legislation to cut the amount of nicotine in cigarettes to a level that’s not addictive, sending the British American Tobacco (BAT) share price to a one-month low.

BAT share price recovers

Since then BAT's share price has slowly recovered some of that lost ground, with investors increasingly focused on growth in the 'new category' area, as combustible products become less attractive.

Putting to one side what level of nicotine isn’t considered addictive could have the unintended consequence of making people smoke more, not less in order to get their fix. While no one is arguing that nicotine isn’t addictive, new legislation is unlikely to resolve the reasons why people feel compelled to smoke in the first place.

Furthermore, it’s not as if tobacco companies don’t have other sources of revenue these days. They do, in the form of e-cigarettes and vaping products which make an increasingly greater proportion of their revenue, and it is here that investors appear to be focusing their attention more and more. We saw that in the recent numbers from Imperial Brands, which suggests a similar trend across the entire sector.

New category targets

Today’s first half-year update appears to bear that out, with management increasingly confident it will meet the £5bn target of new category revenue by 2025, and 50m consumers of non-combustible products across their operations by 2030.

At the end of last year BAT saw a 15% increase in NGP or new category products, and this morning upgraded its constant currency revenue growth to above 5%, ahead of the previous guidance of 3% to 5%, driven by optimism over rising demand for alternatives, across all of its ranges and markets. This included its markets in the US, where its menthol cigarettes and flavoured cigars are facing the prospect of a ban or other form of restriction.

Its Vuse product increased by 5.9% versus 2020, in the top five vapour markets. In Japan, its glo products saw strong growth of 80bps from 2020 levels.

The only downside appears to be in travel retail, which isn’t surprising given the travel restrictions in place globally, which have curtailed sales at airports and other transport hubs.   

The company is also looking to diversify its product range into CBD products after acquiring a 19.9% stake in Organigram, a leading Canadian cannabis provider.

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