Cube Report (12 June 2021) – No reason to sell BATS

Cube Report (12 June 2021) – No reason to sell BATS

Hi everyone,

Here’s a quick, ad hoc report to catch up on the BATS announcement mid-week.

Disclosure: I’m a long-suffering BATS shareholder. I bought in at nearly £45 per share in October 2017.

Since then, the dividends have been excellent, but the market clearly doubts the company’s ability to continue paying them. I’ve received £7 per share over the years!

This brings my “cost basis” down to £38 (although strictly speaking that is not the right way to think about dividends).

The annual payout is currently £2.15 per share, which provides a yield against the current share price of 7.7%.

The poor news flow around tobacco regulation is the main problem and source of risk associated with this stock.

Even without regulations, it could be argued that the smoking habit will gradually fade away. And the “next generation products”, set to replace them, are definitely something of a gamble.

Anyway, that’s enough of a preamble. Let’s check out the key points from the H1 pre-close trading update, released on Tuesday.

  • FY 2021 constant currency revenue growth now expected above 5%, ahead of previous 3%-5% guidance.
  • No change to adjusted EPS growth expectation, mid single digit growth expected.

There is a worse-than-expected currency headwind which is not reflected in this EPS calculation.

Analysts are forecasting EPS of 326p, which gives us a current P/E of 8.6x.


  • No change to expected cash flow conversion of >90%.
  • No change to expected net debt/EBITDA of around 3.0x by year end.

I am particularly pleased to see the leverage target on track, despite the heavy dividends which are worth nearly £5 billion per year.

The “New Category” products are doing very well:

  • Accelerating acquisition of non-combustible product consumers1, up +1.4m to 14.9m in Q1, with our New Category products now sold in 74 markets across 53 countries.
  • Continued acceleration of New Category volume and revenue growth, with market share6 gains across all three New Categories in all key markets.

The Vuse brand (also known as Vype) now has >31% market share in the top 5 markets. In the words of BATS, it’s “approaching global leadership in vapour”. And glo and Velo are also growing market share.

My view

I don’t see any reason to sell this, if I’m honest.

It’s true that it’s not really a “sleep sound” stock, given the regulatory backdrop, but it’s only 3% of my portfolio at this stage.

And it’s so cheap, cashflow generative, and profitable. I think I’m staying in this one for the foreseeable future!



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    FWIW this is my take on BATS update:

    Trying (badly to not be great minds think alike (or herd, pretty sure below is not as contrarian as I like to think it is)

    Raised guidance to 5% constant currency revenue growth and gaining market share across reduced risk/non combustible and gaining share in combustibles
    EPS growth mid single digit and leverage at 3x by year end, cash conversion in excess of 90% (2nd half weighted – fine excise duties related).
    Not expecting a recovery in travel until 2022 – interestingly travel stock prices suggest otherwise.

    Still doing the job in terms of paying the dividend – hideously cheap given that the business is actually growing revenues and earnings. Heavy debt load, but money is free!
    Interesting that they are at No. 3 in sustainability index.

    Exlcuding tobacco & debt, I think this is quite comfortably the best stock in FTSE 100 given quality/value & what seems to be a turnaround/improvement in trading, not to mention the blue sky potential from cannabis
    I would suggest this is a back the truck type position, but then to what extent can you ignore the tobacco – when their business is selling tobacco!!!

    HOLD to ADD – Investment thesis in tact – You would add if you had the cojones!

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