BAT Net Rises 11% on Emerging-Market Demand for Kent

Source from:  By Thomas Mulier July 31 (Bloomberg) 08/01/2008

British American Tobacco Plc, Europe's largest cigarette maker, said second-quarter profit rose 11 percent after smokers in emerging markets from Russia to Malaysia switched to higher-priced Kent and Dunhill cigarettes. Net income climbed to 650 million pounds ($1.3 billion), or 32.35 pence a share, from 584 million pounds, or 28.52 pence, a year earlier, the London-based company said today in a statement. That beat the 622 million-pound median estimate of 10 analysts surveyed by Bloomberg. Revenue gained 17 percent to 2.92 billion pounds. First-half volume sales under its four main brands advanced 20 percent, said BAT, which generates about half its profit in emerging markets. The maker of Lucky Strike and Pall Mall cigarettes is looking to the likes of the ultra-slim Kent Nanotek, introduced last year, to drive demand along with the purchase of Turkey's Tekel, completed during the quarter, and other takeovers. "The emerging-market story for BAT is very much intact,'' said Erik Bloomquist, an analyst at JPMorgan Chase & Co. in London with an "overweight'' rating on the stock. "Uptrading will continue in the key markets of eastern Europe.'' Total volume sales gained 1 percent to 334 billion cigarettes, of which the four main brands accounted for 26 percent. Profit from operations rose 13 percent to 917 million pounds. `Positive' Pricing Volume sales probably will rise about 0.7 percent for the year, and pricing remains "positive,'' Chief Executive Officer Paul Adams said at a meeting with analysts in London. "We haven't really felt the impact of economic developments on our business,'' Chairman Jan du Plessis said in a Cantos interview. "While not immune from the consequences of an economic slowdown, we can certainly look to the future with more confidence than most.'' Currency movements added 134 million pounds to first-half profit and should contribute about 250 million pounds to annual earnings, spokesman Michael Prideaux said in a telephone interview. Tobacco-leaf costs will rise about 20 percent next year, and overall variable costs will climb 10 percent, Chief Financial Officer Ben Stevens said at the meeting. Price increases will absorb almost all the cost gains, he said. BAT fell 14 pence, or 0.8 percent, to 1,852 pence at 10:59 a.m. in London trading. The stock is little changed since March 28, when Altria Group Inc., owner of the Marlboro brand, spun off its international units as Philip Morris International Inc. Swiss jewelry maker Cie. Financiere Richemont SA co-owns a stake in the U.K. company of about 30 percent that may be spun off. China, Indonesia Tobacco use is increasing most quickly in lower-income countries, and China and Indonesia are among the 10 nations where almost two-thirds of the world's smokers live, according to the World Health Organization. European Union tobacco demand probably will fall 1 percent to 2 percent annually in coming years, PMI said last week. BAT has shut factories in western Europe and North America, helping to save 1 billion pounds last year, as government restrictions on smoking eroded demand. The company set a goal in February of this year of cutting a further 800 million pounds from costs annually by 2012. The Tekel purchase gave the cigarette maker control of 36 percent of the Turkish market. In the first quarter, BAT agreed to buy most of Skandinavisk Tobakskompagni A/S to gain control of 60 percent of Nordic cigarette sales. PMI reported a 22 percent gain in second-quarter profit last week on currency movements and higher Marlboro sales in Indonesia and Mexico. Reynolds American Inc., which is 42 percent-owned by BAT, said yesterday second-quarter net income rose 12 percent after higher Camel and Kool prices and snuff sales blunted falling cigarette demand. Tobacco use will kill 1 billion people in this century, a 10-fold increase over the previous 100 years, unless governments in poor nations raise taxes on consumption and mandate health warnings, the WHO said in February. BAT, which was started in 1902 to settle a trade war between U.S. and British cigarette makers, raised its first-half dividend by 19 percent to 22.1 pence a share. Enditem