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Berenberg turns positive on BAT following Reynolds American mop-up deal

Friday, February 10, 2017 3:07
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German broker Berenberg has turned positive on British American Tobacco plc (LON:BATS) following the cigarette maker’s move to take full-control of US peer Reynolds American Inc (NYSE:RAI).

In a note to clients, Berenberg’s analysts said they had upped their rating for BAT to ‘buy’ from ‘hold’.

The move came as they raised their price target for the stock by 10% to 5,670p and increased their full-year 2017 and 2018 adjusted earnings per share estimates for BAT by 1% and 2%, respectively.

In reaction to the upgrade, in mid morning trading, shares in FTSE 100-listed BAT were up 21p to 5,042p.

BAT announced on January 17 that it has agreed to purchase the 58% of Reynolds it does not already own for $29.44 per share in cash plus 0.526 of a BAT share for every Reynolds American share owned.

The analysts said they have assumed the deal is “completed at the end of August 2017 and therefore have a 4-month consolidation of Reynolds-American as a subsidiary.”

US market view …

They noted that: “Following the consolidation of Reynolds American the group will generate over 40% of its net profits from the US market and c63% of profits from the developed world.”

The analysts added: “Historically, BAT had a strong bias towards the emerging markets (EM) but this has now changed.

“We believe this points to both how attractive management views the US market following the 2015 acquisition of Lorillard by Reynolds American, but also possibly that some of the major challenges of volume declines and offsetting rising costs will be felt primarily in the EM.”

They also noted that: “With its acquisition of Reynolds American, BAT will be the undisputed world leader in the vaping market, and it has both a ‘heat not burn’ (HnB) product in ‘glo’ launched in Japan and a hybrid product in ‘iFUSE’ launched in Romania.” 

Story by ProactiveInvestors


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