British American Tobacco (BTI), mcap=$84000m

BTI pitch:
– British American Tabacco – at only 7.8x fwd earnings and nearing inflection point in terms of growth.
– At a lower valuation than during the worst of the GFC, and roughly in-line with COVID lows.
– As the company adds non-combustibles to their mix, margins should continue to move higher.
– The market is more willing to pay a premium multiple for a tobacco business with a larger % of non-smoking products in the portfolio (as happened with PM case).
– Inflation-proof non-cyclical stock with a stable 8% dividend yield.
– Together with EPS growth of 6-7% per year, BTI can be a 14-15% IRR stock for investors without rerating.
– That’s before any EPS growth from non-combustibles.
– Bears point out that tobacco names will never trade at historical P/E multiples owing to heavy government regulation and the movement toward ESG investing.
– But the irony is that regulation only ensures that the supply side of the industry remains tight.

BTI valuation:
– BTI is expected to generate £4.26 of EPS in 2024.
– Historically traded at 12x EBITDA and 13x PE
– Re-rating to 10x 2024 eps results in a $58/share price target.

Exp. gain: +53%

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