EUR 850.00 For Business Accounts Only

Morningstar | CEO Nico Durante to step down next year; we expect a continued push into heated tobacco.

The advent of e-cigarettes has created the most significant change in the industry since the 1960s. Early forms of e-cigarettes have existed for a generation, but with the consumer arguably less brand-loyal and more aware of health issues than ever before, the industry is on the cusp of a seismic shift to next-generation products. It seems likely that conventional tobacco will remain the driving force of the industry profit pool for at least the next decade, but Big Tobacco manufacturers are nevertheless placing their bets on the new categories most likely to win share of smokers.To date, BAT probably has the most hedged position across the emerging categories. Its Vype brand has gained some traction in the U.K., while the acquisition of Reynolds gives it access to Vuse. The company's total 2017 research and development spending of GBP 80 million is well below the $453 million (GBP 365 million) spent by PMI last year, and the $2 billion (GBP 1.6 billion) of capital expenditures its rival is investing behind its heated tobacco facility in Bologna, Italy. In heated tobacco, BAT's Glo has taken tobacco market share of around 4% in Japan by the end of June 2018, although it lags PMI's iQOS. We believe heated tobacco is the category most likely to successfully attract smokers, but we do not regard the first-mover advantage as being sustainable in the long term, and it is possible that BAT will regain share over time.BAT has doubled down on the combustible business with its acquisition of Reynolds American. We see Reynolds as an incredibly strong asset in a market with plenty of remaining potential for raising prices, and we view the deal positively from a strategic standpoint. Reynolds made great progress in repositioning its portfolio to large brands with pricing power in recent years, and the Newport brand, acquired with its acquisition of Lorillard in 2015, is experiencing volume declines at a much slower rate than the rest of the U.S. industry, and retains very strong pricing power in the midsingle digits.