Pricier Cigarettes Boost BAT's First-Half Profits

Source from:  Reuters 07/28/2011

* H1 earnings 96.1p vs consensus forecast 95.1p * Sees another very good year in 2011 * H1 cigarette volumes decline 1 percent * Sees one-off benefit from Japan * Share price up 0.9 percent in lower market (Adds details from briefing, updates shares) British American Tobacco raised its cigarette prices sharply in the first half of the year and saw a one-off boost from Japan, helping it lift profits by a better than expected 10 percent despite a fall in sales volumes. The London-based maker of Kent, Dunhill, Lucky Strike and Pall Mall cigarettes said the price increases of nearly 8 percent helped offset a 1 percent fall in sales volumes to push underlying revenue up 7 percent. BAT, the world's second-biggest cigarette maker and most globally spread of the big tobacco groups, said its ability to raise prices even in low growth markets put it in good shape for growth for 2011 as many economies come out of recession. Chief Executive Nicandro Durante said signs of recovery in key markets, volume declines moderating and higher pricing put the group on "on track for another very good year". "The recovery is dependent on the economies of our markets and in Russia and other key markets the rate of volume decline is moderating," Durante told a briefing on Wednesday. Second-quarter cigarette volumes showed only a 0.2 percent fall after a decline of 1.8 percent in the first three months of 2011, as many economies around the world recovered and the group grew share in many markets. The group posted half-year adjusted diluted earnings per share of 96.1 pence, ahead of market consensus forecast of 95.1 pence according to a company-compiled survey of analysts. The half-year dividend, set at one third of 2010's full year level, rose 15 percent to 38.1 pence. UBS analyst Jonathan Leinster said that after these strong results came ahead of forecasts he expected the full-year consensus forecast for earnings would rise 1-2 percent from the current level of around 193 pence a share. BAT's shares were up 0.9 percent at 28.88 pounds by 1435 GMT, when the FTSE 100 index was down 1.3 percent. "We view this as a very strong result from BAT that testifies to the stock's defensive qualities. Given difficult H1 trading in the foods and home and personal care sector we continue to see tobacco, and BAT in particular, as a strong defensive refuge," said analyst Martin Deboo at Investec Securities. BAT has suffered falling volumes as smokers have switched to cheap, and sometimes illicit cigarettes following excise tax rises and high unemployment levels, but the underlying volumes picture has started to improve. In Japan the group saw a one-off gain from the disruptions to production by domestic maker Japan Tobacco caused by the tsunami in March, with BAT gaining sales of 2 billion cigarettes and a profit of 50 million pounds as it supplies the that market with imports from the United States. This boosted BAT's Japan market share to 20 percent from 10 percent previously, but Durante said he expected Japan Tobacco to recovery most of the share it had lost. BAT has been protected from the downturn by its wide geographical spread of businesses, with the economies of its five top markets of Brazil, Russia, Canada, Australia and South Africa enjoying higher commodity prices. In contrast smaller British rival Imperial Tobacco has been hit by a price war and weak market in Spain, its third biggest market which accounted for nearly 10 percent of all its profits last year, whereas BAT is also major player in Spain but only earns less than one percent of its profits there. BAT confirmed it was looking at state controlled Bulgarian cigarette maker Bulgartabak after the state privatisation agency said on Tuesday it expected BAT and Austrian-registered BT Invest to bid for the group in a 100 million euro auction. "It will come as no surprise that we are looking at it, but I would not hold your breath," said BAT finance director Ben Stevens. BAT, the world's second biggest tobacco group behind Marlboro-maker Philip Morris International , said its first-half adjusted operating profit rose 12 percent to 2.7 billion pounds while overall revenue increased 2 percent to 7.4 billion pounds. Enditem