BAT Sees Signs Of Recovery as Earnings Rise

LONDON - British American Tobacco, the world’s second-biggest cigarette maker, reported signs global economies were starting to improve, as it met forecasts with a 19 percent rise in 2009 earnings on Thursday.

The London-based group, which makes, Dunhill, and Pall Mall cigarettes, gained a boost from price rises, acquisitions, and the weak pound which offset falling underlying volumes and downtrading to cheaper cigarettes.

“We do think that the worst is over in terms of volume declines and downtrading. We enter 2010 with momentum, a strong pipeline of innovations and foreign exchange good,” Chief Executive Paul Adams told a results briefing.

He added the group had increased prices by 8 percent last year to drive growth with good pricing momentum going into 2010 to keep up with global inflation levels, although rising unemployment was still a concern around the world.

Group underlying cigarette volumes fell 3 percent in 2009 hit by deteriorating economies, and were set to fall a further 1-1/2 to 2 percent in 2010, but sales of its more expensive top four key cigarette brands were up 4 percent last year.

BAT shares dipped 2.4 percent to 21.78 pounds by 1540 GMT on disappointment over the weaker cigarette volumes and after a strong recent run when it outperformed UK rival Imperial Tobacco by 7 percent over the last month.

Analyst Julian Hardwick at RBS said BAT’s fourth-quarter cigarette volume dip of 2.4 percent lagged peers with larger rival Philip Morris International
seeing volumes up 0.4 percent and Imperial broadly flat, and he suggest the latter’s stock was a more attractive option.

“With BAT now trading on a two point 2010 PE premium to Imperial, we see a good case for switching into the latter,” he said. Imperial shares were off 0.7 percent at 20.30 pounds.

BAT shares trade on 13.4 times forecast 2010 earnings compared to Imperial on 11.4, and close to Philip Morris on 12.9, according to Reuters data.

“We were a little disappointed by the minus 3 percent organic volume shrinkage in the full year,” said analyst Adam Spielman at brokers Citi.

The group posted 2009 adjusted diluted 2009 earnings per share of 153 pence largely in line with a Thomson Reuters I/B/E/S consensus of 152.6p and a company conducted survey consensus of 152.9p.

Eastern Europe was BAT’s only region to show a profit fall largely due to tough conditions in Russia, but the group saw good volume growth in South Korea, Vietnam and Nigeria.

Profits were boosted by the acquisition of Turkey’s Tekel and Denmark-based ST in 2008 and Indonesia’s PT Bentoel last year, while it gained from the weaker pound against most major currencies and higher cigarette prices.

Annual revenue and adjusted operating profits rose 17 percent and 20 percent, but stripping out the effects of exchange rates both rises were 10 percent.

The full-year dividend, which is set at 65 percent of earnings, rose 19 percent to 99.5p a share.

Earlier this month, Philip Morris beat forecasts with its fourth-quarter earnings as price rises and emerging market growth from the Marlboro-making group offset cigarette volume falls in the European Union.
February 25, 2010

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