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Jefferies thinks US menthol cig ban is unlikely; reiterates blockbuster £50 price target for BATS

BATS shares have been hammered over the past year, part of which is down to threats from the FDA that it will look to ban flavoured cigarettes
menthol cigarettes
US regulators are looking to ban flavoured cigarettes to try to curb the increase of nicotine addiction

Shares in British American Tobacco plc (LON:BATS) puffed higher on Thursday after analysts at Jefferies repeated their blockbuster 5,000p price target.

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].”

READ: £8bn wiped from BATS' value on menthol ban fears

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.

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