Sparks - British American Tobacco

The key financial headline from BAT’s FY25 pre-close trading update is that management expects 2% growth for revenue and adjusted profit from operations (excluding Canada), both at constant currency. At BAT’s H125 results, management indicated revenue would be at the top end of its prior 1–2% range and guided adjusted profit growth of 1.5–2.5%. Therefore, revenue is at the top end of expectations, while adjusted profit from operations is in the middle of the range. The other positive surprise is that operating cash conversion will be in excess of 95%, versus previous guidance of in excess of 90%. Beyond these, there are number of small changes to fx translation and transactional headwinds.

From a product perspective the key highlights are:

• New Category revenue growth accelerated to double-digits in H225 so that it will be mid single digit for FY25. Modern Oral is the fastest growing division due to strong share gains (volume +590bp to 31.8% in top markets) and there has been a recent improvement in Vapour in US. As a result, the New Category profit contribution is increasing.
• Heated Products are broadly flat due to competitive activity and resource reallocation ahead of new product (glo Hilo) launches.
• Vapour revenue improved in H225, driven by the above recent improvement in the US, but revenue is expected to be down high single digits for the full year.

From a geographic perspective the key highlights are:

• The US has strong revenue and profit momentum due to both Combustibles (value share +20bp and volume share flat) and Modern Oral.
• Americas and Europe delivery is quoted as strong, with Combustibles led by Brazil, Turkey and Mexico and Modern Oral performing well, but share losses in Heated Products and Vapour.
• Asia Pacific, Middle East and Africa continues to be affected by the regulatory and fiscal headwinds in Australia and Bangladesh.

Moving onto FY26 guidance, management expects revenue, adjusted profit from operations and adjusted diluted EPS growth to be at the lower end of the medium-term guided ranges of 3–5%, 4–6% and 5–8%, respectively. This is due to potential exits from a number of small markets (Cuba and Mozambique), continued regulatory and fiscal headwinds in Australia and investment to support the many brand initiatives. Management also expect to reduce leverage to 2.0–2.5x, while paying a progressive dividend and undertaking a share buyback of £1.3bn versus FY25’s £1.1bn.