The growth potential of British American Tobacco (BAT) is underappreciated, reports Sharecast, citing Morgan Stanley. The investment bank believes BAT is better able to offset the challenges in the combustible cigarette market than many investors are willing to give it credit for.
The key to its thesis is BAT’s shift from a combustibles business to a nicotine play.
“We see a significant opportunity in BAT’s new model, just as the shares and investor interest hit multi-year lows,” Morgan Stanley wrote in a statement.
BAT’s user base has grown from about 143 million in 2017 to approximately 146 million by 2019 and might reach roughly 155 million by 2030, according to Morgan Stanley.
Management’s ambition, announced in April, is to have 50 million non-combustible users by 2030, up from 11 million at the end of 2019, which would more than compensate for the falling number of smokers.
The broker also highlighted the 50:50 split in BAT’s volumes between emerging and developed markets, strong management and anticipated stable earnings growth of 4 percent to 8 percent over 2020-2-2025.
Its analysts also argued that the dividend payout was “largely secure” as the company refinanced debt.
Furthermore, the company’s improved position in U.S. next-generation-products allows it to capture users migrating to other products if Washington bans menthols, according to Morgan Stanley.