BAT Revenue Beats Estimates After Stemming Cigarette Decline

  • Adverse currency shifts to make fourth quarter more difficult
  • Canadian unit ordered to pay $573 million in Quebec lawsuit

British American Tobacco Plc, the maker of Lucky Strike and Pall Mall cigarettes, reported nine-month revenue growth that beat analysts’ estimates as cigarette shipments reversed a decline in the third quarter.

Revenue rose 4.2 percent in the nine months through September, excluding currency swings, as volume gained 0.4 percent in the third quarter, BAT said Wednesday. Analysts expected a 3.1 percent increase in sales. Still, the company warned that the fourth quarter will be tougher and the strength of the pound will erode profit growth.

“It’s the strongest looking quarter from BAT for some time,” Martin Deboo, an analyst at Jefferies, said by phone. “Eastern Europe and the Middle East look to have been the areas of strength."

The stronger-than-expected sales are a welcome boost for BAT, which is battling against currency swings that are hampering profit growth. The company now expects foreign-exchange movements to reduce full-year operating profit by 12 percent on a translational basis. That, coupled with a comparison to a strong final quarter last year will result in performance moderating through the end of the year, Chief Executive Officer Nicandro Durante forecast.

Rare Upturn

The quarterly increase in shipments is only the fourth time since 2010 that BAT’s volume has risen, James Edwardes Jones, an analyst with RBC Capital, said by e-mail. The upturn was driven by a 9.5 percent increase in BAT’s five top global brands, which include Kent, Dunhill and Rothmans. Still, total volume dropped 1.8 percent in the first nine months of the year. 

The decline in smoking rates across developed nations has driven London-based BAT to invest in emerging markets and new nicotine products. The company is paying about 1.7 billion pounds ($2.6 billion) to buy out minority investors in Souza Cruz SA, the dominant tobacco company in Brazil, one of the world’s largest cigarette markets. It’s also racing Philip Morris International Inc. to develop products that go beyond conventional cigarettes.

The stock rose 1.8 percent to 3,863 pence as of 9:22 a.m. in London. Earlier they rose as much as 2.1 percent to the highest intraday price in almost eight months.

Canadian Setback

Yesterday, a Quebec appeals court ruled that BAT’s Canadian subsidiary must make a payment of C$758 million ($573 million) to secure against defendant costs in smoker class actions, BAT said.

The development is a setback for the company in its effort to limit the impact of C$10.4 billion in damages the unit was ordered to pay in June. The Canadian subsidiaries of BAT, Philip Morris International Inc. and Imperial Tobacco Group Plc successfully appealed a C$1.1 billion provisional execution order related to the case in July.

BAT said it believes yesterday’s order for security payments is unjustified and it’s considering an appeal. The company said in July it’s appealing against the original ruling.

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