Changed Market Environment: British American Tobacco under Pressure

British American Tobacco (BAT) operates in a challenging environment characterized by significant growth in new categories and substantial issues in traditional markets. Recent developments include an increase of 1.4 million non-combustible consumers, while the volume of combustible products decreased by 6.9%. These developments are accompanied by macroeconomic and regulatory pressures. BAT has achieved considerable growth with its new categories, increasing the number of non-combustible consumers to a total of 26.4 million. This segment now accounts for 18% of group revenue, an increase of 1.4 percentage points compared to the previous year, as highlighted by CEO Tadeu Marroco. The strong growth in this segment underscores the company's financial strength, which also maintains an attractive dividend payout to its shareholders. CFO Soraya Benchikh notes that the revenue growth in new categories in the first half of the year is due to the strong performance of Velo across all regions. Additionally, BAT achieved a price-mix increase for combustible products of 4.3%, with a price rise of 7.2%, demonstrating operational efficiency. Despite a high price-to-sales ratio of 2.4x compared to the industry average of 2.2x, BAT is trading below the estimated fair value of £67.25, indicating a potential undervaluation. However, the challenges are significant: declining volumes in combustible products, market withdrawal from Russia and Belarus, and macroeconomic pressures in the USA have led to a decrease in results. The proliferation of illicit products in the USA negatively impacts market share. Financially, the company is in a precarious situation, with rising losses and a negative return on equity of -25.09%. To strengthen its market position, BAT is making significant investments in 2024. CEO Tadeu Marroco expects an acceleration in performance in the new categories in the second half of the year. According to the innovation pipeline, the market is expanding, as reflected in a 48% revenue growth in the APMEA region. Despite these positive outlooks, external threats, particularly from illicit products and regulatory risks, remain a major challenge. Expected net finance costs of approximately £1.7 billion and uncertainties due to exchange rate and interest rate changes increase the risk. Overall, BAT demonstrates considerable strengths in new categories and operational efficiency while grappling with declining volumes in combustible products and financial problems. Investments and innovation offer opportunities for market expansion and profit growth, but external threats and financial weaknesses could significantly impact the company’s competitive position.