BAT sees profits rise despite Covid-19 sales hit

British American Tobacco (BAT) has posted higher annual profits despite seeing the pandemic wipe 2.5% off global sales growth.

The Lucky Strike and Camel maker reported a 10% rise in pre-tax profits to £8.7 billion in 2020.

On an underlying basis, pre-tax profits lifted 1% to £10.2 billion.

Revenues fell 0.4% to £25.8 billion, or up 3.3% with currency movement stripped out, as sales were affected by the coronavirus crisis.

The group said it expects to see an ongoing impact from the pandemic in 2021, which will weigh on revenues and earnings growth.

But BAT had recently said the revenue hit from Covid-19 would be slightly smaller than feared, having previously pencilled in a 3% headwind.

It forecast revenue growth of between 3% to 5% this year and said it is ahead of schedule to deliver £1 billion of annual cost savings by 2022, which will fund investment in new categories, such as vaping.

This comes despite expectations for sales to fall 3% across the wider the global tobacco industry in 2021.

BAT has been expanding what it calls the new categories segment of the market, including brands such as vaping products Vuse and Vype, as well as tobacco-free nicotine pouches Velo.

Results showed underlying sales of of these new categories jumped 15.4% excluding foreign exchange movements, to £1.4 billion last year.

By contrast, cigarette sales by volume fell 4.6%, though revenues for so-called combustibles rose 2.8% on a constant currency basis to £23.6 billion in 2020.

Finance director Tadeu Marroco told the PA news agency that traditional cigarette trading was also affected by travel restrictions and the resultant impact on duty-free sales.

“In the second quarter we saw an impact on combustible products from that hit to duty-free,” he said.

“We’ve seen a lot of variation in markets and generally we’ve seen our more mature markets be much more stable, as restrictions have not been as harsh.

“Because of restrictions we’ve accelerated our digital marketing efforts and we think that’s moving more people towards switching to the new category products.”

BAT hopes to grow revenue to £5 billion in new categories by the middle of the decade.

Jack Bowles, chief executive of BAT, said the group was “uniquely positioned to encourage the switch to reduced risk products”.

He added: “We aim to further accelerate the growth of revenue from our new categories, reaching £5 billion by 2025.

“We are proud that we now have 13.5 million consumers of non-combustible products, a growth of three million – doubling the rate of consumer adoption in the second half of 2020.

“We are well on track to meet our ambition of 50 million consumers of our non-combustible brands worldwide by 2030.”

Shares in the company fell 6% in morning trading as the profits fell short of City expectations.

Richard Hunter, head of markets at Interactive Investor, said: “Despite a ban on cigarettes sales in South Africa between March and August, severe travel restrictions due to the pandemic affecting lines such as duty free and a traditional industry in decline, the company has navigated its way to another year of comfortable profit.”

But he said “all is not plain sailing”.

Mr Hunter added: “The industry is one where, quite apart from changing tastes, the threat of litigation and regulation have been an overhang for some considerable time.

“Further out, although not necessarily in evidence yet, is the possibility that investors will choose to eschew the tobacco sector as an investment destination given the growing popularity of ethical considerations.”