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1/11 To honour the @JSE_School_Bus being back on twitter, I thought it would be worthwhile sharing some of the information I got from a tobacco discussion he shared.
From this discussion I came across a great podcast with one of the investment greats. https://open.spotify.com/episode/4v0yNxLqZMg0SnVxBU9lbU
From this discussion I came across a great podcast with one of the investment greats. https://open.spotify.com/episode/4v0yNxLqZMg0SnVxBU9lbU
2/11 Tobacco screens cheap - There are currently 13 companies in the world with >$2bn of free cash flow that trade below 10x their free cash flow. One of them is British American Tobacco
3/11 Volume debate:
Global cigarette volumes have been in decline since 2009 despite this revenue has been resilient due to pricing power. Margins have also improved and led to EPS and DPS growing ~10% since 2005.
Global cigarette volumes have been in decline since 2009 despite this revenue has been resilient due to pricing power. Margins have also improved and led to EPS and DPS growing ~10% since 2005.
4/11 There has been a recent increase in volume declines (especially in 2019 for the US, however this did recover in 2020) and one can expect the decline to continue (-2% / -4%).
5/11 Countering volume declines with buybacks (effective due to current rating):
Due to the cash conversion nature (>85%) of the business and the limited new growth opp. (relative to their legacy combustible business) they can quickly pay down debt and buyback their own shares.
Due to the cash conversion nature (>85%) of the business and the limited new growth opp. (relative to their legacy combustible business) they can quickly pay down debt and buyback their own shares.
6/11 What this means?
You could buyback more shares as a percentage vs the volume declines. This means the number of smokers per share can go up, or at least not fall.
You could buyback more shares as a percentage vs the volume declines. This means the number of smokers per share can go up, or at least not fall.
7/11 Competition / Pricing Power / Business Model:
It is impossible for new brands to compete – with no advertising medium allowed and insane economies of scale.
Customers are also very loyal to brands – more so than alcohol.
It is impossible for new brands to compete – with no advertising medium allowed and insane economies of scale.
Customers are also very loyal to brands – more so than alcohol.
8/11 Apple has arguably the highest brand value in the world and trades at a 27% margin while tobacco companies trade at >65% margins (BATS above 75%).
9/11 Big tobacco likely to be the winners in the New Generation Products (NGPs) and BATs has a more diversified approach with Vapour, THP and Modern Oral.
10/11 ESG / regulation concerns – also creating the opportunity:
Vaping is less harmful than combustible cigarettes and as this business becomes proportionately larger, this will should help address the ESG concerns.
Vaping is less harmful than combustible cigarettes and as this business becomes proportionately larger, this will should help address the ESG concerns.
11/11 Regulation historically, has indirectly helped big tobacco however this does still warrant a risk one needs to price in
Reminder BATs scores well on the E and the G
Reminder BATs scores well on the E and the G
