South Africa: BAT Stock Worth Buying Despite Price Fall, Says Fund Manager

Source from:  Business Day 12/22/2009

BRITISH American Tobacco (BAT) is worth buying despite an 18% decline in its share price since it was separated from investment company Richemont, fund manager Allan Gray said last week. Consumers are increasingly buying more expensive cigarettes and the company has the ability to expand its profit margin without greatly increasing the prices consumers pay, said the fund manager, which counts BAT's locally listed shares as the second- largest holding in its equity fund. "BAT pays, on average, about 65% of the retail price that smokers pay for its cigarettes over to national governments in the form of excise tax. "This means that increases to BAT's 'net' price have a marginal effect on the end-consumer price, and this leaves scope for gradual increases to BAT' s received price," the fund manager said . BAT, listed in London and Johannesburg, has struggled more than its global cigarette- maker rivals. The share price has fallen almost 6% in the past 12 months while UK-listed rival Imperial Tobacco has risen 10%. The South African operations account for just more than 9% of the group's operating profit. With declining sales volumes world wide, all cigarette makers try to get people to buy more expensive cigarettes. They have struggled to get consumers to "buy up" to more expensive brands in the present recession, however people have actually traded down to cheaper one s. In addition, BAT suffers from having a more dispersed production base than its rivals. Having grown by acquisition, it has more factories than it needs. "There is still much work to be done to rationalise its production and distribution capabilities, which should allow BAT to close some of the productivity gap between itself and the other major tobacco companies," the fund manager said. Others put it more bluntly. "BAT have got a long way to go to become as efficient per cigarette compared with Imperial, Japan Tobacco and Philip Morris. They are the least efficient from a cost perspective," Cadiz Asset Management p ortfolio m anager Mark Ansley said on Friday. Ansley, who said his firm sold all the BAT shares it received after the unbundling in October last year, is also not as positive about the stock as Allan Gray. Ansley is in no hurry to buy it again as he says there is less scope for improvement in earnings. "Relative to other industrial companies who are now delivering cyclically low earnings, we think as the world recovers, we can do far better than other industrial companies who have the potential to recover their earnings," he said on Friday. "They might not be cheaper than BAT now, because they're cyclically depressed, but through the cycle we think they're better to own," he said. Enditem