Trade Idea – BUY BTI

Featured

British American Tobacco (BTI)

Recommendation

BUY

Summary Headline
(left hand section with turquoise background) 22 Words.

We initiate a LONG position. Our upside target is set at R648. We recommend a stop-loss at R540.

Analysts

Peet Serfontein, Thabiso Mamathuba

Summary Copy
(Right Hand summary copy)

147 Words.

British American Tobacco is one of the world’s leading tobacco groups, with brands sold in more than 180 markets. With more than 200 brands in its portfolio, including Dunhill, Kent and Lucky Strike, BAT makes the cigarette chosen by one in eight of the world’s one billion adult smokers.

Technically, price action that remains in an incomplete symmetrical triangle pattern makes the share attractive as an investment option.

The price recently tested its 200-day simple moving average. Crossing above the 200-day will set the long-term trend to bullish. According to the Relative Strength Index (RSI), the share is overbought at ~R700, which leaves some upside potential and makes our profit target of R648 realistic.

British American Tobacco is regarded as a defensive play with strong brands and pricing power. The business has also committed to its dividend pay-out, which shows confidence in the outlook and business model.

Share Information

Share Code

BTI

Industry

Food, Beverage & Tobacco

Market Capital (ZAR)

1 292.76 billion

One Year Total Return

-6.70%

Return Year-to-date

3.31%

Current Price (ZAR)

563.48

52 Week High (ZAR)

731.24

52 Week Low (ZAR)

491.11

Financial Year End

December

Consensus Expectations (Bloomberg)

FY19

FY20E

FY21E

FY22E

Headline Earnings per Share (GBP)

3.24

3.30

3.45

3.71

Growth (%)

1.82

4.70

7.53

Dividend Per Share (GBP)

2.10

2.12

2.21

2.37

Growth (%)

0.57

4.44

7.06

Forward PE (times)

8.37

7.99

7.43

Forward Dividend Yield (%)

7.67

8.01

8.58

Buy/Sell Rationale: 358 words.

Technical Analysis:

• The lower panel shows the Moving Average Convergence Divergence (MACD), which is a momentum indicator that shows the relationship between two moving averages. A change in trend to bullish occurred when the MACD (amber line) crossed above the MACD signal line (black line) – see the black arrow. Also note that the bullish crossover occurred in oversold territory – a quality technical signal.

• Our entry range is between R540.00 and R571.00 and the upside target is set at R648.00 (+13.4% upside potential). Harvest profits close to this level. An extension to R700.00 is likely (RSI overbought territory).

• The recent upward trajectory of the on-balance volume (OBV) indicator confirms that money is flowing into the share. Overall, the trajectory remains downwards – which is a concern.

• Time to exit is mid-May 2021 (taking a medium-term stance). Keep the option open to extend the time exit should the price action unfold sideways or to take profit early.

• Price action below R540.00 (-5.5% from current levels) remains a major concern for downside potential and is recommended as a stop-loss.

Long-term fundamental view:

• British American Tobacco is regarded as a defensive play with strong brands and pricing power. The company has also pivoted towards reduced-risk tobacco/nicotine delivery products, which has grown to almost a third of sales.

• Strong geographic and brand diversity is also a key strength with a brand portfolio covering premium, mid-priced and value for money offerings. The group also owns Reynolds American, which is the second-largest cigarette producer in the US.

• Volume growth has been ahead of the rest of the market with Global Drive Brands doing particularly well. The exposure to emerging markets should support the continuation of this trend going forward.

• In its pre-close trading update for 2H20, management stated that the group continued to gain market share in New Categories.

• Management remains confident on delivering a strong set of 2020 results and is also committed to its 2025 New Category revenue goal of £5 billion.

• Risks to our fundamental view include a sharper-than-expected deterioration in industry volumes, price competition in key markets, prolonged weak macroeconomic conditions and forex depreciation in emerging markets.