British American Tobacco PLC’s (LON:BATS) moves into the cannabis market are “under appreciated” according to analysts at Jefferies, who said the firm’s acquisition of a 20% stake in Canadian cannabis group OGI could provide a “sizeable upside” if it gains a foothold in the US market.
In a note on Friday, the broker upgraded the FTSE 100 maker of Pall Mall cigarettes to ‘buy’ from ‘hold’ and upped their target price to 3,606p from 2,792p, saying that while poor sentiment over BAT’s outlook had weighed recently, they saw sentiment around the firm’s reduced-risk products (RRP) “turning more positive, with likely favourable catalysts and data points”.
“With BAT now finally appearing to have settled on what it views as the best version of Glo (Glo Hyper), as well as allocating significant spend to RRP (and largely heated) this year, we think it will finally start to see some tangible progress”, the broker said.
Meanwhile, the company said BATs cannabis optionality could receive a boost from the US, where political developments “could allow exposure on the THC side very soon”.
“For THC, retail sales in 2020 were US$17bn (growth of 48% vs 2019), and are expected to reach over US$50bn in 2026. For CBD, the US market could hit over US$16bn by 2025 on our estimates. Assuming OGI can gain a foothold in the US there could be sizeable upside to its market cap”, Jefferies said.
Imperial Brands down to hold
“Following the recent [capital markets day], while we're bullish about the extent of change at IMB and the value this could create, we came away somewhat disappointed, particularly with regards to the ongoing focus on legacy assets”, the broker said.
Jefferies said the company’s reliance on its legacy assets put it at risk and that it had failed to really take advantage of the opportunity in RRP.
“With an increasing risk of no smokers in 10-20 years in certain markets, and more specifically, a greater risk in markets that IMB is skewed (EU and US), this [reliance on legacy assets] could weigh… upcoming [regulatory] updates in Europe…could act as a catalyst to further combustible de-rating, particularly the possibility of a "smokefree" fund in the UK”, the broker said.
Shares in BAT were up 0.4% at 2,765p in late-morning trading, while Imperial Brands was down 0.9% at 1,480.5p.