Last year was an extraordinary year, with the spreading financial crisis, the development of economies slow down and the market's confidence were shaken badly. British American Tobacco PLC have not escaped from the recession, but managed to stand in a strong position in the market. This report demonstrates its relatively strong financial position compared to its main competitor: Imperial Tobacco.
The brief introduction of British American Tobacco PLC
Formed in 1902, British American Tobacco (BAT) has experienced over a century's development. Now, it has become the world's second largest quoted tobacco group in global stock market. Furthermore, BAT is a real international company who is operating 49 cigarettes factories in 41 countries of Asia, Africa, Europe and America.
According to Jan du Plessis, chairman of the organization, despite the bad impact of financial crisis, the company has achieved great success in 2008, including satisfied financial results and 2 important acquisitions.
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Among the world, the cigarettes sales have decreased in developed markets. However, the volume of sales is still increasing in some developing markets in Eastern Europe and East Asia. In fact, the main UK competitor of BAT is Imperial Tobacco Group PLC. Additionally, recent years, both BAT and Imperial Tobacco have to deal with problems including illicit trade, increasing regulation and challenging economic situation.
The brief introduction of Imperial Tobacco Group PLC
Imperial Tobacco was established in 1901. Compared with BAT, Imperial Tobacco mainly focuses on Europe Market, and provides a wide range of products including cigarettes, tobaccos, cigars, rolling papers and tubes. Besides, it has tried to gain more profit from emerging markets in Eastern Europe, Africa and the Middle East.
In 2008, it must be mentioned that the acquisition of Altadis has been the highlight of this year for the organization, which has contributed a lot to the significant increase of cigarette sales.
Evaluation of Financial Statements
As can be seen from the following tables, BAT's Net profit margin and Gross profit margin has increased steadily from 2006 to 2008. This trend may result from its efforts on cutting the costs of sales and all kinds of expenses. Additionally, according to the Chief executive, it may also attribute to the strong performance of BAT'S Global Drive Brands (GDBs) and the strong brand portfolio of the company.
Oppositely, after a slight rise between 2005 and 2007, Imperial Tobacco has experience a sharp decrease on net profit margin and gross profit margin in 2008. It may due to the restructuring costs caused by the integration of Imperial Tobacco and Altadis, since there were no restructuring costs in the year ended 30 September 2007. For the similar reason, Imperial Tobacco' ROCE dropped significantly in 2008.
BAT's Gearing increased by about 10 percent from 2008 to 2007, which means the company took higher level of debts. However, although Gearing of Imperial Tobacco has decreased during 2005 and 2008, the figure was still higher than that of BAT's. In this case, it will be more risky for potential users to choose Imperial Tobacco as their investment target. It is also worth mentioning that despite the higher risk caused by higher Gearing, BAT has managed to sustain its profitability in 2008.
BAT's interest cover ratio fluctuated near 10 during these 4 years. The slight decline in 2008 may due to the increased finance costs which were result from the 2 acquisitions made during the year. In contrast, Imperial Tobacco's interest cover ratio went down dramatically from 2006 to 2009.
In the following chart, it is clear that after a drop in 2007, BAT's dividend yield ratio recovered to nearly 5% in 2008. That is partly because the growth of dividend per share. Actually, the company had decided to raise the ratio of dividends paid as a percentage of long-term sustainable earnings from at least 50 percent to 65 per cent by 2008, which may accelerate the rise of dividend per share. Furthermore, the market value per share of BAT declined slightly from 19.65 to 18, which may have led to the increase of dividend yield ratio.
The EPS of BAT went up steadily between 2005 and 2008. For instance, the figure was 128.78p in 2008, which means a 19 per cent increase over 2007. According to the company's financial review, it may due to the strong operating performance and benefits from foreign exchange movements. In contrast, the EPS of Imperial Tobacco dropped significantly in 2008, as a result of restructuring costs and one-off acquisition accounting adjustments.
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Marked to Standard
The P/E ratio of BAT went up from 2006 to 2007, but dropped in 2008 from 18.71 to 14.63. This trend is due to the decreasing market value per share and increasing EPS. It reflects that the market's confidence for BAT's future is falling. In the contrary, Imperial Tobacco's P/E ratio went up sharply in 2008, as a result of the dramatic decline of EPS.
The current ratio of BAT has dropped to 0.98 compared to 2007 and 2006. The figure remained steadily in the period from 2006 to 2007, since the current assets and current liabilities had little change. However, these 2 variables rose dramatically in 2008 due to the increasing volume of inventories and borrowings, additionally, the figure of current liabilities increased faster than current assets. Thus, BAT's current ratio dropped. It means that less available assets could be matched up to settle the debt which will be due soon. Imperial Tobacco's current ratio has also declined in 2008. The latest figure is 0.68, even lower than that of BAT's, which is less ideal for prospective users.
Acid test ratio of BAT seems dropped slower than the current ratio, since the inventories increased faster. In fact, BAT's raw materials and consumables had risen by 392 million, while finished goods and work in progress had risen by 768 million. In addition, Imperial Tobacco had only got an acid test ratio of 0.39 in 2008, the low figure may reflect that it could not gain enough assets aside from inventory to settle the debts which will be duo soon.
The Cash generated from operations to maturing obligations of BAT had fallen by 0.17 to a number of 0.40. In fact, the company managed to gain more cash from its operation, the number was increased from 2,600 (2007) to 3,539 (2008). However, the figure of current liabilities grew more substantially due to the increasing borrowings which may cause by 2 acquisitions and deteriorating consumer confidence in the market.
Although Imperial Tobacco remained stable (0.48) in this ratio between 2006 and 2007, it cannot avoid the sharp decrease in 2008, since the acquisition of Altadis had brought to much liabilities. It is not rational for potential users to choose a company whose cash generated from operations to maturing obligations ratio is 0.22.
The Average Inventory Turnover Period of BAT remained stable (around 155) in 2006 and 2007. Both inventories and cost of sales changed little during this period. But, the inventories rose because of acquisitions and bad impact of economic recession. Furthermore, the costs were cutting through primary supply chain efficiencies and further standardization. In this case, the ratio grew to 205.13 in 2008. In the contrary, Imperial held a much smaller figure than BAT, which may result from the increasing stock due to the acquisition of Altadis.
BAT's revenue to capital employed was relatively stable during these 3 years, while Imperial Tobacco's ratio dropped significantly in this period from 2.82 to 1.07. BAT's revenue increased steadily for 3 years, but the number of long-term liabilities grew a bit faster than revenue. Compared to Imperial Tobacco, BAT seemed to be more smoothly.
It seems that in 2005 BAT had experienced a recession; all of the figures had fallen down. After that, the gross profit recovered quickly in 2006, while other 3 figures increased gradually from 2005 to 2008. In the contrary, all the figures of Imperial Tobacco increase slowly from 2005 to 2007. In 2008, the operating profit went down quickly, while other 3 figures rose dramatically.
It is clear from the chart that compared to BAT, the profitability of Imperial Tobacco is problematic. Furthermore, Imperial Tobacco's figures of cost of sales are relatively too high. In contrast, BAT's gross profit and operating profit have increased steadily as a whole except the bottom point in 2005. And, it seems that BAT had managed to control the cost of sales well.
From the analysis above, we can conclude that British American Tobacco performs better in many ratios than Imperial Tobacco. It is clear that the operation of BAT is steadier than its competitor. Furthermore, BAT is more profitable and efficient, seems to be able to hold its strong position in the market by sparing no effort to implement its strategy. In this case, BAT would be a strong and relatively rational investment target.