LDN - Business

BAT boosts vaping investment again as competition heats up

[April 25, 2018] By Martinne Geller and Arathy S Nair

(Reuters) - British American Tobacco <BATS.L> is raising its investment in new vaping devices again, as Big Tobacco reacts to new competitors such as fast-growing U.S. group Juul.

Cigarette sales are declining, as more people curb the deadly habit due to rising taxes and a proliferation of alternatives such as e-cigarettes and gadgets that heat tobacco without burning it - making them potentially less harmful.

In February, BAT said it planned to increase spending on "next generation" products by 500 million pounds ($697 million)in 2018. On Wednesday, it said it expected to raise that further, based on the products' good performance so far.

It did not give details beyond flagging plans for a significant number of launches towards the end of the third quarter.

Jefferies analysts said that, while a long-term positive, the increased spending could add to near-term concerns over margins and profitability.

BAT, the world's second-biggest international tobacco company by revenue, currently trails Philip Morris International <PM.N> in tobacco-heating products.

However, Investec analysts believe BAT's "glo" device is at least as attractive as Philip Morris's iQOS, and should be able to steal meaningful market share over the medium-term.

BAT's shares were up 1 percent at 0915 GMT.

MARKET CONCERNS

Philip Morris's lead in tobacco-heating had given its stock a premium over rivals, but its shares have fallen 19 percent since last week, when it said uptake of iQOS in Japan, its biggest market, was slowing. It blamed older smokers, who were proving less eager to switch than younger early adopters.

The sell-off, which also pulled down shares of BAT and Imperial Brands <IMB.L>, highlighted "the uncertainty that tobacco companies and investors face around a successful and profitable shift to reduced-risk next generation products," Liberum analysts said.

What is more, Big Tobacco faces a fierce new U.S. competitor called Juul Labs Inc, whose discreet e-cigarette has taking a chunk of the vaping market. The palm-sized device is particularly popular among teenagers, prompting worry among parents and health experts.

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A staff of British American Tobacco Japan demonstrates its new tobacco heating system device 'glo' after a news conference in Tokyo, Japan, November 8, 2016. REUTERS/Kim Kyung-Hoon/File Photo

On Tuesday, the U.S. Food and Drug Administration said it had launched a crackdown on vaping devices sold to minors, particularly those made by Juul.

It has also sparked concern for investors in Big Tobacco.

"That brand came from nowhere, so that has led people to worry that maybe barriers to entry are less than we all thought," UBS analyst Nik Oliver said this week.

"Saying that, BAT in particular has a very exciting pipeline ... so I think they've got the tools to respond quite well, but in the short term, Juul got there first."

Earlier this month, BAT, the maker of Dunhill and Lucky Strike cigarettes, told Reuters it planned to start testing in late 2018 a new version of its Vype line of e-cigarettes called the Raptor, which produces a stronger nicotine punch than existing products.

The company did not say which markets would see the test.

BAT also plans to test a carbon-tipped tobacco heating product called "neocores" this year, and to introduce its "ePen3" e-cigarette in the third quarter. The latter is in limited distribution in Britain at the moment, but has not been officially launched.

Philip Morris and Imperial Brands also have new devices in the works.

BAT reiterated on Wednesday it aims to more than double revenue from next-generation products to well above 1 billion pounds this year. It also repeated its forecast for a hit from adverse exchange rate moves this year.

($1 = 0.7163 pounds)

(Reporting by Arathy S Nair in Bengaluru; Editing by Keith Weir and mark Potter)

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