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BAT resumes its compression towards PM

CONSUMER STAPLES
  • BAT's decision to restart buybacks (£700m this yr) on the 3.5% ITC stake sale (totalling £1.5b) was not unexpected for us but lowering leverage target by ~0.25* to 2-2.5* (its at 2.6* right now) was. At the midpoint (2.25*) that's another ~£4b reduction in net debt (on FY24/25 EBITDA consensus).
  • Its hard to doubt mgmt on the new target - over the last 5yrs its avg'd £2-3b in debt repayments taking leverage down by -1*. Healthy FCF generation has allowed it to keep dividend yield at a now est. 9.9% (!) but offset for equity returns is a share price that's traded flat.
  • Its rated (Baa2 Pos, BBB+ S, BBB Pos) - S&P the highest and most timely (its only one to come since FY earnings changing outlook from neg. to stable). We don't see upward rating action from it on the new targets - it needs leverage close to 2* for that (vs. current S&P adj. 2.9*/company reported 2.6*) & needs strong operating performance.
  • Phillip Morris which has now entered its phase of deleveraging (-0.3*-0.5* this yr) & has better headline growth prospects (EBITDA expected to grow in high single digits yoy vs. BAT flat) continues to trade tight to BAT (a € not $ dynamic).
  • We take off the firm view for BAT to underperform/widen now - but with it unlikely to get its uplift into A (to match PM) even on new targets, we still see BAT weakness as the likely on spread sell-offs. As we've highlighted before historical broader tobacco discount has also come in on this spread rally.

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  • BAT's decision to restart buybacks (£700m this yr) on the 3.5% ITC stake sale (totalling £1.5b) was not unexpected for us but lowering leverage target by ~0.25* to 2-2.5* (its at 2.6* right now) was. At the midpoint (2.25*) that's another ~£4b reduction in net debt (on FY24/25 EBITDA consensus).
  • Its hard to doubt mgmt on the new target - over the last 5yrs its avg'd £2-3b in debt repayments taking leverage down by -1*. Healthy FCF generation has allowed it to keep dividend yield at a now est. 9.9% (!) but offset for equity returns is a share price that's traded flat.
  • Its rated (Baa2 Pos, BBB+ S, BBB Pos) - S&P the highest and most timely (its only one to come since FY earnings changing outlook from neg. to stable). We don't see upward rating action from it on the new targets - it needs leverage close to 2* for that (vs. current S&P adj. 2.9*/company reported 2.6*) & needs strong operating performance.
  • Phillip Morris which has now entered its phase of deleveraging (-0.3*-0.5* this yr) & has better headline growth prospects (EBITDA expected to grow in high single digits yoy vs. BAT flat) continues to trade tight to BAT (a € not $ dynamic).
  • We take off the firm view for BAT to underperform/widen now - but with it unlikely to get its uplift into A (to match PM) even on new targets, we still see BAT weakness as the likely on spread sell-offs. As we've highlighted before historical broader tobacco discount has also come in on this spread rally.