Book Profits on This NYSE-Listed Tobacco Major – BTI

Mar 01, 2022 12:00 AM PST | Team Kalkine
Book Profits on This NYSE-Listed Tobacco Major – BTI


British American Tobacco PLC

British American Tobacco PLC (NYSE: BTI) is a British multinational corporation that produces and sells cigarettes, tobacco, and other nicotine-containing products. Dunhill, Kent, Lucky Strike, Pall Mall, Rothmans Neo, Vuse, Newport, Camel, and Natural American Spirit are among the company's leading brands. BTI has 2.29 billion American Depository Shares (ADS) listed and outstanding (each ADS representing one ordinary shares).

Why should Investors Book Profits?

  • Long Cash Conversion Days: At the end of December 31, 2021, the company's cash conversion days were 527.0 days, compared to the industry median of 89.1 days, implying that the company takes a long time to convert its inventory to cash.
  • Leveraged Balance Sheet: As of December 31, 2021, the company's debt/equity ratio was 0.59x, compared to the industry median of 0.20x. As a result, the company's exposure to balance-sheet risk has increased.
  • Decline in Sticks Equivalents: According to the company, traditional oral stick volumes fell 3.9% YoY to 8.0 billion sticks equivalent in FY21. In addition, total combustible sticks volumes fell 0.30% YoY to 655 billion sticks equivalent during the same period.
  • Regulatory & Taxation Risk: Tobacco manufacturers are required to comply with various regulatory regimes around the world, making the industry highly regulated. These restrictions may limit BTI's capacity to market its products, jeopardizing the company's and financial health. Furthermore, BTI is sensitive to unanticipated and severe increases in tobacco and nicotine-related taxes in its main markets, which might significantly impact its revenues and results of operations.

 Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

BTI's share price has surged 31.80% in the past three months and is currently leaning towards the higher end of its 52-week range of USD 33.62 to USD 47.24. We have valued the stock using the EV/EBITDA multiple-based relative valuation methodology and arrived at a target price of USD 40.16.

Considering the significant rise in the share price in a short span, long cash conversion cycle, the decline in sticks equivalent, and other induced regulatory risks in the business, we recommend a "Sell" rating on the stock at the closing price of USD 45.18, up 3.46% as of February 25, 2022.

Three-Year Technical Price Chart (as of February 25, 2022). Source: REFINITIV, Analysis by Kalkine Group 

*All forecasted figures and Industry Information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.