BAT expects doubling of vapour product revenue in 2018

[LONDON] British American Tobacco , the world's biggest international tobacco company, sees revenue from its "next generation products" doubling to more than £1 billion (S$1.79 billion) next year.

And these products, which include e-cigarettes and devices that heat tobacco without burning it, should exceed revenue of £5 billion by 2022, BAT said on Wednesday.

Although still tiny compared with its traditional cigarette brands like Lucky Strike and Dunhill, the business should break even by the end of 2018 and deliver "substantial profit" by 2022, BAT said ahead of briefings for analysts and investors.

BAT said it is confident about another year of "good"earnings growth at constant currency for the overall company, and at current exchange rates it sees a lift of 6.5 per cent on operating profit and 5.5 per cent on earnings per share, helped by the weak British pound.

It said the pricing environment in a number of markets has been difficult, particularly in Russia, but that recent developments were encouraging.

BAT shares opened 1.4 per cent higher in London.

Jefferies analysts said BAT's medium-term estimates seemed "a bit light" given how fast the so-called vapour market is developing.

BAT and rivals Philip Morris International, Japan Tobacco International and Imperial Brands are racing to deliver the best alternative to cigarettes as more people try to quit smoking.

"We are inclined to believe (BAT) is taking a cautious approach for now, especially around US development," Jefferies said in a research note.

"That aside, the concrete data is very encouraging and should be a key catalyst in the market beginning to give them appropriate credit for reduced risk value (which we think is minimal at present)."

Philip Morris is ahead in the segment for tobacco-based products with its iQOS device, but BAT is trying to catch up with a device called glo.

In Japan, a key testing ground, BAT said glo has cornered 1.8 per cent market share in a leading convenience store chain two weeks after its national roll-out.

Glo will soon expand into Russia, its fifth country. Philip Morris has said iQOS would be in more than 30 markets by the end of this year.

Whereas e-cigarettes use nicotine-laced liquid, glo and iQOS heat tobacco to a high enough temperature to create a vapour but not smoke.

Philip Morris has applied to U.S. health regulators to have iQOS recognised as having "modified risk" compared with cigarettes.

The relative health benefit of these products was questioned earlier this year in a study that found that they release chemicals linked to cancer, sometimes in higher concentrations than conventional cigarettes.

REUTERS