British American Tobacco PLC (LSE:BATS) is starting to breathe a little easier.
Deutsche Bank has upgraded its price target on the FTSE 100 stalwart from 3,500p to 3,800p, citing a stronger second half outlook and improved momentum in its New Categories division, the part of the business focused on products such as vapes and heated tobacco.
At first glance, BAT still seems anchored to its traditional roots, but a closer look at its first-half trading update, published on 3 June, tells a different story.
According to analyst Damian McNeela, the group expects its revenue for the first half of 2025 to come in slightly ahead of expectations, thanks largely to a recovery in the United States.
That recovery is driven by a dual lift: strengthening performance in the conventional cigarette segment, referred to in the note as “Combustibles”, and robust sales of Velo, the group’s flagship nicotine pouch.
Outside the US, Velo continues to be the fastest-growing part of BAT’s so-called New Category portfolio. However, the performance is not uniform.
While the Americas and Europe (AME) are said to be delivering solid results, regulatory turbulence in Bangladesh and Australia has weighed on performance in the Asia-Pacific and Middle East region.
Despite these headwinds, the company believes its New Categories, which include vaping products and heated tobacco, will accelerate in the second half of the year.
BAT anticipates low single-digit (LSD) revenue growth in these segments for the first half, picking up to mid-single-digit (MSD) growth for the full year. This improvement is “underpinned by both further growth in Velo globally and the launch of glo Hilo in heated tobacco,” Deutsche says.
Investors have been waiting for signs that BAT’s diversification strategy is starting to pay off. The firm has pledged to generate half its revenue from non-combustible products by 2035.
While that goal still lies some way off, Deutsche’s revised target suggests confidence that BAT’s slow pivot is beginning to stick. At 3,528p, the shares are already trading above the old target, but Deutsche sees more room to run.