Canaccord cuts British American Tobacco's target price

27th Feb 2014 15:49

British American Tobacco delivered fiscal year 2013 results which were basically in line with consensus estimates, although the company faces several headwinds. The company did, however, manage to raise its adjusted operating margins by 100 basis points to 38.1% despite 3% volume attrition and macroeconomic weakness in Asia, analysts at Canaccord Genuity wrote to clients on Thursday. However, costs were expected to come under pressure with the European Union's Tobacco Product Directive requiring numerous packaging changes. More fundamentally, the broker was now more convinced that the firm, and its peers, should be valued using a higher 'beta' - a measure of a stock's riskiness relative to the market based on past correlations - given the advent of electronic cigarettes. It was impossible to predict what impact they will have although they are certain that it will lead to pressure on margins, Canaccord said. Furthermore, they believe that the buy-out of Reynolds American would not meet some investors' expectations for earnings enhancement. That was because Reynolds' key brands overseas were in fact the property of Japan Tobacco and the regulatory environment in the US remained difficult.On the basis of all of the above, they decided maintain their 'sell' recommendation on the shares while at the same time reducing their target price to 2,900p from 3,000p. AB