Picture: 123RF/ginasanders
Picture: 123RF/ginasanders

British American Tobacco (BAT) has cut its revenue target for its cigarette alternative business, which the world’s second-largest tobacco company had touted as its key growth area.

With a market value of R1.5-trillion, BAT is the second-most valuable company on the JSE. It also accounts for the biggest share of JSE-listed Reinet’s net asset value, an investment vehicle controlled by the well-known Rupert family.

Releasing an operational update on Tuesday, BAT said revenue from tobacco heating products and vapour was expected to be £900m in the year to end-December, down from an earlier forecast of £1bn.

The reduction in the revenue forecast for the so-called next-generation products, which are seen as less harmful than traditional tobacco products, was driven by a flat market in Japan for tobacco heating products and the effect of a product recall in the US.

BAT has said smokeless products, which include glo, offer choices to consumers searching for alternatives to traditional cigarettes and form the centrepiece of its strategy to transform tobacco.

Adviceworx portfolio manager Caroline Cremen said BAT’s days as the darling of the dividend and rand hedge for investors were over despite the fact that many institutions still maintained large holdings in the company, which has its primary listing on the London Stock Exchange.

“In developed markets, the trend towards a healthier lifestyle and increased regulation will continue to limit sales of traditional tobacco products. Most governments of less developed economies are following suit,” she said.

“The business case for increasing revenue and market share gains in the global vapour business in the short term is sound.  But I do not believe that this will be a sustainable source of revenue in the long run. Concerns about the health implications of these products will increase the risk and likelihood of regulatory intervention, and there are myriad competing products from existing and rising competitors being released onto the market.”

The company also noted that its unfavourable currency movements would take the shine off its adjusted earnings-per-share growth for the year to end-December.

However, on a constant currency basis, the company said it would exceed its adjusted earnings-per-share growth target in 2018.