We have a £44.5 12-month target price, based on a combination of P/E and DCF. We think the current P/E is depressed and with increasing confidence that BAT can grow its revenues and margins in Next Generation Products, that the stock deserves to trade on 13.5x 1-year forward multiple. This coupled with our DCF valuation (where we use 5.7% WACC and fade long-term incremental economic profit calculation to zero) suggests a target price of £44.5.

There are several risks that may prevent BAT from achieving our target price, or may cause it to exceed it: 
– BAT shares are likely to rise or fall depending on sector rotation. If the market rotates away from, or towards defensives, tobacco will underperform or outperform 
– BAT has high financial leverage. The market may start to worry more about this, potentially causing a significant fall in the share price. 
– Foreign-exchange risk is significant for BAT, in particular the U.S. dollar. 
— Cigarette volumes: We expect cigarette volumes to improve in the U.S. relative to 2019 but our forecasts could turn out to be too high or too low. 
– Next Generation products: BAT could greatly exceed or disappoint against expectations for glo, Vype, Vuse and the other NGPs. 
– Investors may become more or less worried about regulations in the U.S. and elsewehere
– BAT has risk from litigation, mainly via its exposure to Canada (as well as the US). Several Canadian provinces have passed legislation designed to help the provinces sue BAT for billions of dollars using reduced levels of proof. Its Canadian subsidiary has sought protection from litigation creditors, but it is not clear how the situation will play out.
– BAT could suffer from further large excise tax rises.
– SRI – The stock could fall if more investors avoid the stocks for SRI reasons.