BAT Profit Rises 6.4% as Cigarette Prices Increase

Source from:  By Thomas Mulier July 26 (Bloomberg) 08/03/2007

British American Tobacco Plc, the world's second-biggest traded cigarette maker, said second- quarter profit rose 6.4 percent after the company increased prices on Lucky Strike and Pall Mall cigarettes. Net income climbed to 584 million pounds ($1.2 billion), or 28.52 pence a share, from 549 million pounds, or 26.39 pence, a year earlier, London-based BAT said today. Sales fell 0.7 percent to 2.49 billion pounds. The shares slipped after the company said second-half profit growth will slow. The cigarette maker said it raised prices in Brazil and South Africa ahead of higher taxes. Mergers have cut the number of tobacco companies and enabled those that remain to charge more, offsetting shrinking consumption. Japan Tobacco Inc. bought Gallaher Group Plc in April, and Imperial Tobacco Group Plc offered last week to acquire Altadis SA. ``BAT is one of the best-positioned tobacco companies to benefit from price increases,'' said Erik Bloomquist, an analyst at JPMorgan Chase & Co. in London who has an ``overweight'' rating on the stock. BAT is also gaining as smokers switch to more expensive brands, he said. Shares of BAT, whose brands also include Kent, slid 46 pence, or 2.8 percent, to 1,597 in London, tracking a stock selloff across Europe. Britain's benchmark FTSE 100 Index declined 3.2 percent, the most in more than four years, on concerns about tightening credit markets worldwide. Volume Growth, Canada Second-half operating profit excluding currencies will trail the first half's 18 percent pace because of tax increases in Malaysia, South Africa and Brazil. BAT also expects a ``significant'' increase in second-half marketing spending. Higher prices will fuel revenue growth this year even as BAT sells about the same number of cigarettes as last year, Chief Executive Officer Paul Adams has said. Altria Group Inc., the largest traded cigarette maker, said July 18 that second- quarter profit rose 4.9 percent on higher Marlboro prices and non-U.S. sales. Profit beat the median estimate from eight analysts surveyed by Bloomberg for profit of 571 million pounds. Next year's volume growth should return to BAT's normal range of 1 to 1.5 percent, Adams said in an interview today. BAT's Canadian unit may increase its profit next year after that market shrank 9 percent in the first half, he also added. Smokers are ``probably prepared to pay substantially more,'' said Thomas Russo, who holds BAT shares among the more than $3 billion he helps manage at Gardner Russo & Gardner in Lancaster, Pennsylvania. He spoke before the results. Smoking Bans Currencies will cut about 35 million pounds from second- half profit given their current levels, spokesman Michael Prideaux said. Foreign-exchange effects reduced first-half profit by 115 million pounds. Chief Financial Officer Paul Rayner previously said currencies would probably reduce annual operating profit by 4 to 5 percent. Rayner said BAT's second-half operating profit margin will be lower than in the first half, when it was 32.2 percent. Consumption in western Europe has been falling about 1 percent to 2 percent a year as taxes, prohibitions on advertising and smoking bans gather pace. That has spurred BAT and rivals to expand in emerging markets. England and France started restrictions on smoking in public places this year. Most European Union countries enacted bans on tobacco advertising by 2005. The stock has advanced about 13 percent in the past year, matching gains by Altria. Of 17 recommendations compiled by Bloomberg, 14 analysts rate BAT ``buy'' and three have it at ``hold.'' None rate the stock ``sell.'' Reynolds Buyback? BAT raised Adams's pay 21 percent to 2.57 million pounds last year as profit beat the company's target for a third consecutive year since he started the job. The company has a goal of increasing earnings per share excluding one-time items by almost 10 percent on average over coming years. BAT also aims for about 6 percent average operating growth per year and 3 percent to 3.5 percent average growth in sales excluding currency fluctuations. British American Tobacco owns a 42 percent stake in Reynolds American Inc., which sells Camel cigarettes in the U.S. Reynolds yesterday said second-quarter profit fell 14 percent as earnings were boosted in the year-earlier period by a factory closing and hoarding before price increases. Adams today said the company would be ``supportive in principle'' if Reynolds started a share buyback program, though the U.S. company hasn't approached BAT about the matter. Reynolds Chief Financial Officer Dianne Neal yesterday said Reynolds would only make such a move if BAT would participate, responding to questions from analysts on a conference call. BAT said it will pay an interim dividend of 18.6 pence a share, 18 percent more than last year. To contact the reporter on this story: Thomas Mulier in Madrid at tmulier@bloomberg.net. Enditem