The bases are loaded, there are no outs, and BAT is ready to swing for the fences.
Wonderful write-up! A quick question on the valuation methodology used in your DDM with Exit Multiple. I noticed that you strip out adjusting items from terminal EV then discount to PV whereas, to my knowledge, common consensus is discount terminal EV THEN strip our adjusting items to get PV of Equity (otherwise you would be double discounting the debt and cash). Perhaps I'm just naive to this specific modeling technique as my DDMs typically gets capped by a perpetuity TV and, truthfully, I'm partial to FCFF models where I'm significantly more comfortable. I notice that were you to compare FMV using these two TV methods you end up with a near $20 intrinsic valuation differential due to the significance of debt on the valuation. It would be extremely helpful to understand your thought process in deriving PV of Equity!
Thanks for the detailed article. All is not well between BAT and ITC ( Indian associate). BAT is against to unrelated diversification whereas ITC is going ahead with it. BAT infact stopped ITC to issue new ESOPs so as to stop diluting its stake in ITC. So your assumption that BAT can influence policy in India through ITC is something to take a conservative view on unless BAT explicitly mentioned the same with solid backing.
Great piece, bud. I’m growing very fond of your thorough analysis and views on this “orphaned” sector.
Thank you for this in-depth article!
How concerned are you by the Aug 17th patent infringement judgement against BAT: https://news.bloombergtax.com/ip-law/philip-morris-gets-14-million-from-reynolds-on-e-vapor-patents? The amount that BAT needs to pay PMI is minor, but PMI is also asking for either an injunction on the sale of Vuse Alto (BAT's best selling ENDS in the US) or royalty payments.
BTW, there's a minor typo in the first table, S&P's latest rating change was Feb 11, not Nov 2: https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/type/HTML/id/2794479. I assume you swapped the day and the month.
Thanks excellent well researched piece on last member of big 3.
Don't know what you can do after BAT clears the bases perhaps a follow up on Swedish Match?
You've inspired me to reread Ashes To Ashes by Richard Kluger a history of the American Tobacco industry with a focus on the "secret six", fascinating but very dense 807 pages.
my 1 company in the portfolio