British American Tobacco´s valuation "very attractive", Citi says

19th Jan 2017 19:05

(ShareCast News) - Analysts at Citi gave a strong endorsement of British American Tobacco, touting the company´s strong top line growth and the many benefits which wil accrue to shareholders as a result of its merger with Reynolds American.The firm was already generating some of the best organic revenue growth in the European staples space, analsyst Adam Spielman, Jemima Benstead and Ravi Sharma said in a research report sent to clients.On top of that, the appreciation seen in the Russian ruble and Brazilian real meant the merger was likely to become a 'tailwind' in the second half of 2017.Furthermore, the combined company would be earning over 40% of its sales from the US, so there would be less exchange rate, regulatory, and taxation risk."Reynolds makes BAT stronger [...] valuation looks very attractive," Citi said as it reiterated its 'buy' recommendation and 5,600p target price.The rate of organic sales growth would be higher and the extre cash would give it more ammunition to grow faster in developing markets and technologies if it saw opportunities.Tax reform in the States would also add between 6% to 11% to earnings per share, Citi said, adding that it had not yet factored this potential boon into its forecasts.Under the new rules, BAT would also be able to decide which jurisdiction was most favourable.To be specific, looking out to 2019 the merger would add roughly 4% to its earnings per share and 8% to its free cash flow.Citi´s estimates had been updated to fully incorporate the contribution from Reynolds American starting from the second half of 2017.Shares in BAT closed the session as the second best performer on the leaderboard after gaining 2.23% to 4,734p.