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Nicotine risks in price of BAT and Imperial Brands suggests Credit Suisse

The US generates c50% of BAT’s profits and c30% of IMB’s

British American Tobacco PLC -

Risks of a reduced level of nicotine in cigarettes in the US are already discounted in share prices of British American Tobacco PLC (LON:BATS) and Imperial Brands PLC (LON:IMB), Credit Suisse suggested today.

Share prices of the two tobacco giants tumbled on the report in the Wall Street Journal, as the US market is a big earner for both companies.

“The US generates c50% of BAT’s profits and c30% of IMB’s. On paper, a nicotine ‘ban’ could have a harmful impact on both companies’ P&Ls,” said the broker in a note.

But Credit Suisse added that US regulator the FDA tried something similar in 2017 and since then the value of both companies has halved.

“Our working assumption is that as the FDA (Biden has yet to appoint a permanent head) is required to consider a number of issues including the risk of boosting demand for illicit cigarettes, it would take years to clear all of the regulatory hurdles and legal challenges.

“Although we understand the negative reaction of tobacco share prices to this headline (particularly following a period in which they have outperformed the staples sector) and do not dismiss the associated risks, we regard the valuations as anomalously low.

“BAT and IMB trade at FY21E PE of 8.2x and 6.0x, respectively”

Shares in BAT rose 0.4% to 2,703p while Imperial edged up to 12,469.5p.

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