BAT: Jack hits the road as the vapors attention fails to ignite the rating

In 2020, then-CEO of British American Tobacco, Jack Bowles, vowed to build a “better tomorrow”. He was referring to an expansion of vaping devices and other nicotine alternative products by cigarette maker Lucky Strike and Camel.

There will be no more tomorrow for Bowles at BAT. His four-year term was struck down on Monday. He is succeeded by Tadeu Marroco, BAT veteran and financial director of the group since 2019.

The surprise reshuffle comes less than a month after BAT paid a Fine of $635 million to US authorities for violations of North Korean sanctions between 2007 and 2017. The North Korean sanction was the largest transaction of its kind.

However, BAT’s strong focus on ESG factors – its thesis is that it is driving the transition from tobacco to safer nicotine – hasn’t brightened up markets for some time.

As part of its ‘Better Tomorrow’ strategy, BAT is aiming for £5 billion in revenue from steam and other ‘new category’ products by 2025. Sales reached £2.9 billion in 2022, on 10 % of group total. The new product business will operate at a loss until 2024.

The strategy failed to ignite investor enthusiasm. Since its launch in March 2020, BAT shares are up 7%, compared with a 50% rise in the FTSE 100 index. UK-listed rival Imperial Brands group, which in 2021 back to cigarettes — gained 44% in the same period.

BAT trades on a forward P/E ratio seven times below its five-year average. It seriously lags US rivals such as Philip Morris International by 16 times.

The company’s communications with investors under Bowles’ tenure focused too much on new products at the expense of things that were actually “doing well,” according to Panmure Gordon’s Rae Maile.

BAT’s traditional cigarette business is not without its challenges. It lost market share in the United States last year. Consumers’ disposable income has taken a hit, prompting them to switch to cheaper products.

There have been other disappointments. In February, BAT decided not launch a new share buyback program. Marroco could score an early win by reversing that decision. Shareholders hoping for a change in direction similar to Imperial Brands, however, will be disappointed.

Marroco insisted BAT on Monday was on the “right strategic path”. One could theorize that BAT shares help investors hedge against the risk of rapid smoking cessation. They clearly need a lot more convincing.