BATS shares have almost halved over the past year, largely on concerns that margins will take a whack as more people switch to e-cigarettes and the like, while US regulators have threatened to take action as it looks to curb rising levels of nicotine addiction in young people.
One of the measures the Food and Drug Administration is looking to bring is a ban on menthol cigarettes, but Jefferies isn’t convinced such a thing will ever happen.
“The market reaction…reflects a view that a rule to ban menthol is happening,” read a note to clients.
“We think the market has got this wrong. First, we think a ban remains unlikely as not supported by enough evidence. Second, if a ban was to come, we think the cumulative lost profit would be minimal due to users staying with a non-menthol variant, or switching into reduced-risk products [RRP].”
That view contrasts with RBC Capital, which is of the opinion that a ban will come into force by 2025. That is reflected in its 2,700p price target – almost half what Jefferies is looking for.
The Canadian bank reckons BATS is no longer a ‘defensive’ play, with the uncertainties making its future “very opaque”.
“We expect growth in next-generation products (NGPs) to erode the tobacco industry’s historically insurmountable barriers to entry and, by extension, extremely high competitive concentration and profitability,” read its research note on Thursday.
“In addition, the FDA proposal to ban menthol cigarettes in the US will, we estimate, impact group sales and margin by 2025, meaning that in aggregate group EBIT margin will have fallen by around 1,000 basis points by 2030.”
Investors seemed to side with Jefferies though, with shares jumping almost 2% to 2,789p in mid-morning trade.