Barclays lifted its price target on British American Tobacco on Monday to 3,400p from 3,300p, arguing that the shares are at an inflection point.
The bank, which maintained its ‘overweight’ rating, said BAT has been a frustrating stock to own over the last three years, with a total return of around 41% versus 50% for the MSCI World Staples Index. However, Barclays reckons this is about to change due to two catalysts.
“First, BAT will start repurchasing shares soon – we think BAT could repurchase circa £10bn in shares by FY25 (c15% of market cap) and still see net debt/EBITDA decline from c3x in FY21 to c2x by FY25.
“Second, BAT will now start breaking out NGP (next generation product) contribution losses; we think these are c$1bn today.”
Barclays noted that BAT has guided for NGP to break even by FY25.
“As NGP losses reduce and share repurchases step up, BAT’s earnings per share growth should accelerate from 6% in FY20/21 to 9% in FY22/23E, and 10%+ beyond FY24E,” it said.
Barclays said that at 8% dividend yield and 7.5x 2022E price-to-earnings, the stock is cheap.
