Citi has named British American Tobacco PLC (LSE:BATS) its top pick in European staples, raising its target price to £39 and arguing that earnings momentum is starting to turn in the company’s favour.
Following a solid pre-close update in June, BAT upgraded its full-year organic sales guidance to growth of 1–2%, in line with consensus and Citi’s own forecast of 1.5%.
Revenue for the first half is also expected to grow in the same range, with consensus at 1.2% and Citi a touch lower at 1.1%.
There may not be many surprises in the upcoming results, but the second half could be more interesting.
Citi expects earnings growth to accelerate later in the year as new product categories expand. The bank currently sees first-half operating profit rising by around 2%, in line with consensus.
The real opportunity lies in the back half of the year. Citi sees scope for margin improvement from the core tobacco business and points to encouraging progress in modern oral products, where BAT is gaining market share.
The launch of glo-Hilo, its new heated tobacco device, is expected to help steady the company’s performance in that segment.
Meanwhile, in the US, a possible crackdown on illicit vape sales could allow BAT’s Vuse brand to claw back share, giving another boost to sentiment.
Although the shares have already begun to re-rate, Citi argues there is still value on offer.
The balance of risks is now tilting to the upside, it says, and the combination of steady growth, improving margins and potential market share gains makes BAT a standout in the sector.
In late afternoon trading, the shares were up 1.6% at 3,661p.