BAT Trading Update Preview

Tobacco companies remain relatively insulated from inflation pressures, but can BAT ward off the competition amid the Philip Morris acquisition of SWMA?

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The outlook

BAT's first-half trading update is often used by the firm to update its guidance. Typically, the firm offers little detail beyond general market conditions. But, given the disruptions in the tobacco space lately, investors could be taking a closer look at the trading update this time around. Particularly after cutting its revenue outlook back in March, due to pulling out of Russia.

At the time, BAT disclosed that Russia and Ukraine amounted to about 3% of the firm's revenue. But it didn't say if, or how much impairment the operation would imply. Russia is a relatively large market, particularly in the discount segment. The trading update might be an opportunity to get a firmer number on the cost of the exit from Russia. If BAT has to adjust the guidance anew, it could get investors a little worried.

Other commentary of note

BAT's executives haven't commented much on the PM-SWMA potential takeover. So, the two big issues that investors might want CEO Bowles to address are: 

1. Potential for consolidation in the market that would put competitive pressure on margins.
2. How much impact will inflation have on demand? *tobacco tends to have relatively inelastic demand (possibly because customers are addicted!) but eventually the price pinch could impact margins. Either people switch to cheaper tobacco or cut back somewhat.

On the other hand, BAT reported an increase in cash flow last year, in particular thanks to revenue in new categories showing explosive growth. That allowed for raising dividends and share repurchases, suggesting management is still pretty confident despite inflation. But, with that size of warchest, some might fret that the company isn't investing in new growth initiatives.

BAT’s range near breakpoint 

BAT is trying to break outside a multiyear sideways range formed by 2500p and 3500p. THe breakout could be hugely significant but there are some hints it might not come yet. Momentum is not increasing, and the MACD histogram shows clear divergence on the weekly. 3000p is major support to any decline. 

Even with a short-term pullback, staying above the aforementioned major support would increase the long-term probability of going into a full-fledged bull market. Another factor is the ‘Golden cross’ of the 50/200 moving averages, which offers a major bullish signal should it occur. Should the breakout occur, BAT has a chance at the 50% Fibonacci near 4000.

Key takeaways

BAT's trading update might be an opportunity to get a firmer number on the cost of the exit from Russia. If they have to adjust guidance again or if it isn't clear how much impairment leaving Russia would imply, investors will take any update with a pinch of salt.

BAT’s executives haven't said how they feel about the potential PM-SWMA takeover and investors are waiting for more information on potential market consolidation and inflation. They will also want to know if BAT is planning to invest in new growth initiatives.