JOHANNESBURG - One of the flagship events of the financial advice world is the annual Investment Forum held at Sun City recently. South African and international fund managers present to a gathering of 800-odd financial advisers over a two-day period, covering all the different asset classes, and elaborate on their stock picking.
Their widely divergent views on which shares to hold are noteworthy. Some fund managers express themselves strongly against a company, while others will convince you of the merit of buying the same share, especially companies like Naspers and Discovery, which are viewed very contradictory. Being a delegate at the investment forum, you realise just how intricate stock picking is - all the highly educated and highly regarded fund managers have complete opposing views!
The only share of which most fund managers were singing praises, and putting on the table their reasoning for buying right now, was British American Tobacco (BAT).
A closer look at BAT ticks all the boxes of an excellent buying opportunity at the current price.
BAT is one of the world’s leading tobacco and next-generation products groups, with brands sold in more than 50 countries. BAT manages a portfolio with more than 200 brands, including the five “Global Drive Brands”: Dunhill, Kent, Lucky Strike, Pall Mall and Rothmans. The company makes the cigarette chosen by one in eight of the world’s one billion adult smokers, and have a portfolio of innovative tobacco- and nicotine-based products, offering consumers potentially less risky alternatives to conventional cigarettes.
In the past, BAT has rarely disappointed shareholders. BAT remains an excellent company with a well-balanced portfolio of brands that covers all major price points.
It offers returns genuinely uncorrelated to the South African economy, and attractive exposure to global consumers, with a tilt towards the US, the world’s largest and most profitable cigarette market. The share currently trades at a desirable forward price/earnings ratio of only 13.8 times, and a forward dividend yield of 4.8percent.
Improving margins
Over the past 17 years, BAT has delivered more than 13percent compound annual dividend growth in British pounds, increasing its dividend every year this century. This illustrates its ability to improve margins through operating efficiencies continually, and market share gains, despite industry volume declines.
BAT’s purchase of US business Reynolds International shifts its exposure towards a more profitable, less competitive market where it’s also the clear leader in the vaping space. US tax cuts provide an additional boost to future profits.
The next step for BAT is the move towards next-generation products (NGPs), including vaping and heat-not-burn products that offer customers their nicotine fix with a 95percent reduction in harmful chemicals. They expect NGPs to account for almost a fifth of group revenue in the next five years.
The group’s global scale in both distribution and manufacturing, coupled with its leading technology, position it well to migrate a significant proportion of its cigarette customers to NGPs over the coming decade. In an industry where advertising is mostly prohibited, it will be almost impossible for a new competitor to enter and gain significant market share.
Risks
Increased competition from illicit trade, unexpected and significant excise increases, ever-changing litigation, disputed taxes, interest and penalties, as well as adverse foreign exchange rate movements always remain a risk. With its geographic diversity, talented people (employing around 50000 worldwide) and a proven strategy, they are well placed.
Their products have traditionally demonstrated resilience in times of economic uncertainties, given its sturdy economic moat combined with strong brand loyalty. The group boasts a strong balance sheet with good margins, and healthy cash generation. BAT’s return on equity of more than 60percent justifies a higher valuation than the current 14 times forward earnings.
Amelia Morgenrood, BCom (Hons) Financial Planning, is a member of the South African Institute of Stockbrokers, a Portfolio Manager and Regional Director: Faerie Glen Stockbroking & Financial Planning.
The views expressed here are not necessarily those of Independent Media.
- BUSINESS REPORT
