2008-03-12

BAT strikes it lucky once more

It was not so long ago that British American Tobacco was considered to be among the least fashionable stocks in the FTSE 100. Its history includes a foray into the insurance business and owning Saks Fifth Avenue.

But having shed its surplus businesses and turned its focus back to its tobacco roots, the maker of Lucky Strike Cigarettes among others has in recent years transformed itself into a City darling - a status likely to be confirmed when it posts annual results on Thursday.

The stock has tripled in value during the past five years. Paul Adam, the chief executive, has beaten the company's goal for high single-digit growth in earnings per share every year since he took over in 2004.

This week, he is expected to do it again.

The consensus among analysts is that sales will climb 1.2 per cent to £9.87bn and earnings before interest, tax and exceptional items will increase by 7 per cent to £3bn. Earnings per share growth is expected to be about 9 per cent.

Like its competitors, BAT has seen cigarette sales in the US, parts of Europe and other mature markets fall amid increasing health concerns, smoking bans, higher taxes and advertising restrictions.

Yet the world's second-biggest tobacco company has sustained growth by focusing on raising profit margins in western Europe and increasing sales in emerging markets where populations and the popularity of smoking are still climbing.

Sales in emerging markets account for half of group revenues and profits. Their importance to BAT's growth strategy was highlighted last week when it snapped up Tekel Cigarette, Turkey's state-owned cigarette maker. for $1.72bn (£874m).

Tekel was BAT's first significant acquisition in almost five years. The transaction could strengthen the company's foothold in the world's eighth largest tobacco market, lifting its share of the Turkish market from 7 per cent to 36 per cent.

BAT's own Turkish business has been loss-making since it entered the market in 2002.

Mr Adams also said that he would be interested in the monopoly businesses operating in Egypt and Algeria if they ever came on to the market.

But for all the praise that has been lavished on BAT's wide geographical reach, analysts say they are putting most of their faith in BAT's ability to cut costs. The group has saved £729m in the four years to 2006 by closing factories and cutting production capacities in countries where fewer people are smoking. The company is widely expected to unveil a second round of cost cuts on Thursday.

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