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Stricter regulation and margin hit from e-cigarette switch to weigh on BAT trading update

Aside from the blue-chip tobacco firm, the day ahead will also bring updates from retailers Dixons Carphone and Superdry, plus US inflation numbers
Cigarettes
The tobacco industry has been rocked by new restrictions the US government is planning to put on nicotine products

British American Tobacco plc (LON:BATS) will issue a trading update on Wednesday having seen its share price almost halve over the past year on concerns about stricter regulation and with margins taking a hit as more people switch to e-cigarettes.

The tobacco industry has been rocked by new restrictions the US government is planning to put on nicotine products.

Last month the US Food and Drugs Administration announced measures to prevent minors from using flavoured nicotine products and is considering a ban on menthol cigarettes.

But analysts at US broker Jefferies International have kept FTSE 100-listed BAT as their top pick in the sector as they believe market fears around risks of US headwinds are overdone.

“It has the best growth outlook across the space in our view, yet is the name that has been most plagued by anchoring/short-termism,” the Jefferies analysts said in a recent note.

In a trading update in October, BAT lowered its annual revenue target for cigarette alternatives, blaming a flat performance in Japan and a product recall of its Vuse Vibe power units in the US earlier this year due to malfunctioning batteries.

It said it expected revenue from next-generation products, which include e-cigarettes and tobacco-heating devices, of £900mln this year, down from a previous target of £1bn.

The company, which owns Lucky Strike and Dunhill cigarettes, also warned that currency fluctuations would drag on its adjusted EPS growth by 7% if rates remained unchanged.

Tough times for Dixons Carphone

On the second line, as Christmas fast approaches, updates from retailers will also be eyed closely on Wednesday.

Electricals stores group Dixons Carphone Plc (LON:DC.) has lost more than fifth of its value so far this year and its first-half numbers could make for grim reading.

The FTSE 250-listed firm’s like-for-like sales were flat in the first quarter, but those figures were flattered by the FIFA World Cup.

The ‘Amazon effect’ has forced Dixons to cut prices in recent years which has hit profits, but there’s only so much cutting that can be done.

Dixons full-year profit before tax is still expected to be around £300mln, and investors will want to see proof that that’s likely to be the case with the interims.

Colder weather to help SuperDry

Elsewhere, SuperDry PLC (LON:SDRY), the fashion brand of choice for ‘trendy’ forty-something dads, will also publish its interim numbers on Wednesday.

The coat and jackets maker has also been struggling given the tough retail climate in the UK, while the warm weather hasn’t helped, denting demand for its warm winter outerwear which is what it’s known for and is one of its main profit drivers.

Co-founder Julian Dunkerton left in March after deciding a “change of strategy” was needed, although he has since threatened a comeback in light of the weak trading, which contributed to profit warning last month.

In a note on Monday, City broker Liberum slashed its price target for SuperDry to 700p from 900p and cut its estimates, with its pre-tax profit forecasts shopped by 30% so far this year and it reckons there is scope for more cuts as well.

Liberum’s analysts reckon SuperDry’s new strategy “is clearly not delivering” and called for a “strategic rethink” to get the company back to where it should be.

Significant events expect on Wednesday:

Trading updates: British American Tobacco plc (LON:BATS), John Wood Group PLC (Q3) (LON:WG.), Blancco Technology Group PLC (LON:BLTG)

Interims: Dixons Carphone Plc (LON:DC.), Superdry PLC (LON:SDEY), Fulham Shore PLC (LON:FUL), Evgen Pharma PLC (LON:EVG), Polar Capital Technology Trust PLC (LON:PCT)

Economic data: US CPI


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