BAT shares slump 7% after announcing R597 billion write-off amid strategy shift

BAT will begin amortisation of the remaining value of its US combustibles brands starting next month. Photo: Supplied

BAT will begin amortisation of the remaining value of its US combustibles brands starting next month. Photo: Supplied

Published Dec 7, 2023


Shares in British American Tobacco (BAT) slumped 7% on the JSE yesterday after the company said it was writing off R597 billion on some of its cigarette brands, with analysts saying the company had paid too much for these although new products had attained break-even earlier.

BAT traded 7.73% weaker at R545.90 in afternoon trade on the JSE yesterday as investors weighed future prospects for the company and the effects of the write-off.

“Cigarettes are taking a pounding in USA, volumes down. Many headwinds. New products are doing quite well with break-even soon, two years earlier than expected,” said Wayne McCurrie, an analyst with FNB.

Other analysts said BAT had “clearly paid too much for the acquisition of Reynolds” a few years ago.

Macroeconomic pressures in BAT’s US market were also impacting its cigarettes business, the company said. For the 2023 full-year period, group revenues in BAT are now expected to be in the low end range of its 3–5% growth.

Impetus has been provided by “continued strong volume and revenue growth in new categories” that include smokeless products. The contribution of the new category products is projected to break even in 2023, two years ahead of the company’s initial projection.

BAT has committed to “Building a Smokeless World” and expects 50% of its revenue to be generated from non-combustible cigarettes by 2035. It has, however, had to take an impairment of R597 trillion on some of its traditional combustible cigarette productions.

“Consistent with our vision to ‘Build a Smokeless World’, and in combination with the current macroeconomic headwinds impacting the US combustibles industry, in 2023 we will take an accounting non-cash adjusting impairment charge of around £25 billion,” said Tadeu Marroco, the CEO for BAT.

He explained that the impairment related to “some of our acquired US combustibles brands, as we now assess their carrying value and useful economic lives” over an estimated period of 30 years. BAT will begin amortisation of the remaining value of its US combustibles brands starting next month.

In the US, continued proliferation of illicit modern disposables continued to impact the combustibles industry volume in the second half of the year under review. Recently, the company had also started to see “signs of premium segment pressure” after a more stable first half.

“While our year-to-date volume share is down 10 basis points vs FY22, our commercial plans continue to show early signs of share recovery with a 50bps improvement between January and October driven by Newport, Natural American Spirit and Lucky Strike. We have been clear that recovery in US combustibles will take time; however, we are confident that the actions we are taking will strengthen our portfolio over the longer term.”

BAT is seeing opportunities to grow revenues in the new category productions as nearly 10% of the world’s one billion smokers currently are using new category products. The long-term “opportunity for growth as we deliver on our transformation” is thus viewed by the company as vast.

The company is actively investing into strengthening its US business, accelerating innovation momentum in heated products globally, and enhancing its capabilities that support delivery of strategies, it said.

“These investments will impact in 2024, and alongside continued macroeconomic pressures in the US, we now expect growth in revenue and adjusted profit from operations of low-single digit on an organic basis at constant rates. We expect mid-single digit adjusted profit from operations growth on an organic basis at constant rates by 2026,” the company said.

But for the 2023 year-end, BAT is anticipating disappointing performance from the glo business on the back of slower industry growth, increased poly-usage particularly intersecting with Vapour, and heightened competitive activity in Japan and Italy.

These headwinds had resulted in a deceleration of organic volumes and revenue growth, especially during the second half period of the year under review.

Year-to-date volumes for glo were subsequently expected to be down by 100 basis points in key markets to 18.2%.

Although glo maintained its position as the world’s second-largest supplier in the category, BAT is “working hard to strengthen our innovation pipeline to drive momentum in our longer-term" performance.

“glo Hyper Air is performing in line with expectations, and we have recently launched veo, a range of non-tobacco consumables in 10 markets in Europe, gaining first mover advantage in this new space, with encouraging early results.”