BAT Earnings: New Categories Achieve Profitability as Management Unveils Capital Allocation Options

Our thesis on British American Tobacco is that while the stock is materially undervalued, the company needs to sharpen its operational focus to accelerate internal cash flow generation and implement a clear capital allocation strategy, whether that is to return capital to shareholders or to scale its investments in some of the emerging nicotine categories. Preliminary 2023 results were slightly below our forecasts, but BAT's announcement that it will consider partially liquidating its stake in ITC is an encouraging step in the direction of improving shareholder returns, in our opinion. We are reiterating our wide moat rating and our GBX 3,900 fair value estimate. Even after the stock gapped up in trading after the announcement, there is significant upside to our valuation, and we are warming to the idea that new CEO Tadeu Marroco's operational and capital allocation strategies could unlock that upside.