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British American Tobacco (Baa1 Stable now/BBB+/BBB+) Moody's Upgrade follow up

CONSUMER STAPLES

Upgrade is backward looking driven by the co's lower net leverage target of 2-2.5x (from original 2-3x) which it introduced in March. Moody's adjusted gross leverage is circa +0.5x over co's reported net for reference.

  • Its flagging the US combustibles weakness - which we also noted on Altria's miss. Reminder Altria is pure-play US and unlike PM and JAPTOB, is still heavily combustibles. It's also noting the pressure in US vapes from sale of illicits - a common complaint from both Altria and BAT.
  • It sees EBITDA falling 5% this year before rising LSD in the next two years. Upgrades are limited even on continued deleveraging; it wants to see more non-combustibles exposure make up sales (where the growth is). Consensus is looking for a -2.3% EBITDA fall before a similar LSD rise.

We will need to circle back on RV but we've generally been confused by BAT trading in line with Altria and Imperial - former lacks geographical diversification, latter is the lowest in the sector for non-combustibles exposure. A harsh 35-40bp pickup also there for rotations out of JAPTOB/PM into BAT between the 3-5yr - but that spread is still inside historical levels.
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