BAT: US listing not a batty idea given valuation gap with rivals

Read recent headlines and you could easily think the motto of the City is “last one to leave, please turn out the lights”. Irish multinationals CRH and Flutter are among the would-be defectors. British American Tobacco should be another candidate, according to shareholder GQG.

BAT — which has not commented on the issue — is barely a UK company at all, if its shareholder base is anything to go by.

US investors hold more than 35 per cent of the stock, four times the figure for UK funds. ESG investors are common in the UK and avoid tobacco stocks. BAT’s biggest shareholder is US behemoth Capital Group with over 16 per cent of the company. Spring Mountain, located in the Cayman Islands, holds nearly 9 per cent. GQG is in the top five with 1.5 per cent.

BAT is heavily exposed to the US market, which produces about half its profits. Its “next generation products” — the heated tobacco and vapes which are the growing segment — have reached nearly £3bn in sales, or 15 per cent of group revenues. BAT is expected to increase revenues by 3-4 per cent a year out to 2025, according to S&P Capital IQ.

BAT should be benchmarked against international pack leader PMI and US tobacco group Altria. PMI is ahead on next generation products, which accounted for about a third of sales. Altria lags behind. The combined share of revenue from next generation products was 19 per cent in 2022. Combined revenue growth should be 4 per cent, according to Barclays analyst Gaurav Jain.

As Lex has highlighted, BAT is losing market share in the US. Its heated products are not yet making any money. It has disappointed the market of late with the suspension of its buyback programme.

That said, there is no denying the yawning valuation gap. PMI and Altria trade at a blended multiple of 12 times next year’s earnings. BAT is on 7.5 times. Upping sticks is not, in itself, a fail-safe way to light up a stock. But the embers of this idea will continue to emit an attractive glow.