Yahoo Finance Tobacco Giant BAT Takes Big Leap Into Cannabis Market After Buying 20% in Organigram
British American Tobacco (BAT), a multinational tobacco company, said on Thursday that it will acquire about 20% equity investment in leading Canadian cannabis licensed producer Organigram for nearly 126 million pounds as it eyes to expand into the rapidly growing marijuana industry.
Following this announcement, the U.S. listed Organigram’s shares, which slumped about 47% last year, surged about 40% to $4.04 on Thursday.
After this deal, the tobacco giant would gain access to cutting-edge R&D technologies, product innovation, and cannabis expertise, complementing BAT’s extensive plant-based expertise and development capabilities.
Organigram has a proven track record of consumer-led innovation and developing high-quality adult-use recreational and medical cannabis products, which are legally available in Canada. By leveraging Organigram’s first-hand experience, BAT will deepen its understanding of this rapidly expanding and evolving area, the company said.
The investment was priced at C$3.79 per share which was based on the five-day volume-weighted average price of Organigram Holdings Inc.’s shares on the Toronto Stock Exchange ending March 9, 2021 and represents a discount to the closing price of C$3.94 on March 9, 2021.
The FTSE-100 behemoth British American Tobacco (BAT) shares, which slumped about 17% in 2020, gained nearly 6% in the last two weeks. The stock price was up slightly on Thursday.
Analyst Comments
“We view this move as a strong positive. One, cannabis overall provides a natural fit for tobacco and a big incremental growth opportunity. Two, the price paid looks reasonable in the context of similar deals, the company and the current environment. Three, it comes before the possible entry of OGI (and possibly BAT) into the world’s biggest market, the U.S.,” said Owen Bennett, equity analyst at Jefferies.
“The U.S. is the world’s biggest cannabis market by far. For THC, retail sales in 2020 were c$17 billion vs global of c$20 billion and are expected to approach close to $50 billion in 2026. For CBD, the US market could hit over $16 billion by 2025 on our estimates. For THC, to date, Canadian operators have not been able to enter the US. This looks like it could change very soon. Assuming OGI can gain a foothold in the US there could be a sizeable upside to its market cap. In addition to possible appreciation in associate value and associate income, the release says that BAT can also commercialize any products themselves (although how this would impact its FTSE listing if it did this beyond CBD, so THC, we are not sure).”
British American Tobacco Stock Price Forecast
Eleven analysts who offered stock ratings for British American Tobacco in the last three months forecast the average price in 12 months of 3,492p with a high forecast of 4,000p and a low forecast of 2,792p.
The average price target represents a 32.78% increase from the last price of 2,630p. Of those eleven analysts, ten rated “Buy”, one rated “Hold” while none rated “Sell”, according to Tipranks.
Morgan Stanley gave the base target price of GBX 3,130 with a high of GBX 5,100 under a bull scenario and GBX 1,500 under the worst-case scenario. The firm gave an “Overweight” rating on the multi-national tobacco company’s stock.
“We see BAT’s user base continuing to grow globally, particularly in the US, which could offset the increase in risk from a flavor ban on its portfolio. Our rating reflects strong near-term earnings visibility in an uncertain environment. We estimate a 5.5% EPS CAGR over 2020-25e. We forecast ~£5 billion in NGP revenues by 2025 (in line with BAT’s £5 billion ambition by 2025).
“We think BAT should be trading near the bottom end of our 8-12x P/E range in the current environment. We see upside risk to earnings near term (2020-21) due to cost savings and FX (US exposure 51% of profits).”
Several other analysts have also updated their stock outlook. JPMorgan set a GBX 3,500 target price on British American Tobacco and gave a buy rating on the stock. The Goldman Sachs Group set a GBX 3,900 price objective and gave the company a buy rating. Credit Suisse Group set a GBX 3,920 price target and gave the company a buy rating.
Moreover, Deutsche Bank set a GBX 4,000 target price and gave the stock a buy rating. UBS Group restated a buy rating and issued a GBX 3,600 target price. Royal Bank of Canada set a GBX 3,200 target price and gave the stock a buy rating.
This article was originally posted on FX Empire
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