British American Tobacco confirms Reynolds American scoops (s?) - part 2

Friday, 21 October 2016, 10:56 am

On second thoughts perhaps Jonthan Leinster, a scribbler over stockbroker Berenberg, should claim the this morning's BAT / Reynolds scoop. At 6:00 am this morning (so before the market had open) the analyst, who upgraded BAT to "buy", published a note raising the prospect of the London-listed tobacco giant buying the remaining 58pc of Reynolds that it doesn't own. I have pasted the salient paragraph below:

  • Upgrade to Buy: Following the recent underperformance of the stock we move from a Hold to a Buy with an unchanged price target of $54/share. We estimate average adjusted EPS growth over 2017-18 of 9-10% pa, and the stock offers a c4% dividend yield, also growing at 9-10% pa. Although market share growth may have been slightly less than some observers originally expected, that share growth is coming from the most profitable brands (Newport and Natural American Spirit), and price/mix within the market remains strong. Higher MSA and FDA costs will occur in 2017, but the full synergy benefits of the merger will only be felt in Q4 2016, the “political engagement” costs will cease in Q4 and price/mix remains strong. Hence we still believe 2017 should see strong margin growth, though industry volume decline rates will move back to their historical average (-3.5%). In the long term it is, in our view, possible that British American Tobacco will look to buy out the 58% it does not already own.

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