Deutsche Bank has admitted it was surprised by British American Tobacco PLC (LSE:BATS)’s commentary around results, saying the cash conversion figure of ‘well in excess of 90%’ caught the eye of the research team.
The words ‘well in excess’ were new to Deutsche. BATS’ chief executive broadly hinted that with debts falling to below three times EBITDA, excess funds may be ploughed into stock repurchases.
“We recognise the clear value of a share buyback at the current valuation,” said boss Jack Bowles.
BATs built on Tuesday’s results-driven momentum with a further 1.5% rise in the share price to £26.92.
The current price values BATS at just eight times this year’s earnings, falling to 7.5-times and then 6.9-times.
The stock is yielding over 8% with gentle increases priced in. In other words, BATS is becoming a cash machine (if it wasn’t already).
Of the 19 banks and brokers covering the stock, only one is a ‘seller’; City sentiment is overwhelmingly positive towards the cigarette maker.
Deutsche rates the shares a ‘buy’ up to £40, around 13% ahead of the market consensus.