Business context and reporting period
British American Tobacco p.l.c. (BAT) filed its annual Form 20-F for the fiscal year ended 31 December 2020. This is a full-year report, not a standalone fourth-quarter filing. Financial statements are prepared under IFRS as issued by the IASB and reported in pounds sterling.
BAT sells combustible tobacco, traditional oral tobacco and newer non-combustible products, including vapour, tobacco-heating products (THP) and modern oral nicotine products. Its strategy is to grow New Categories while using the combustibles business to fund investment and reduce debt.
Financial performance and position
| Metric | 2020 | 2019 / change |
|---|---|---|
| Revenue | £25.776bn | £25.877bn; down 0.4% |
| Adjusted revenue at constant exchange rates | £26.670bn | Up 3.3% |
| Profit from operations | £9.962bn | £9.016bn; up 10.5% |
| Adjusted profit from operations | £11.365bn | Up 2.1% at reported rates; up 4.8% at constant rates |
| Operating margin | 38.6% | 34.8%; adjusted margin was 44.1%, versus 43.1% |
| Profit for the year | £6.564bn | £5.849bn; up 12.2% |
| Diluted EPS | 278.9p | 249.0p; up 12.0% |
| Adjusted diluted EPS | 331.7p | 323.8p; up 2.4% reported, or 5.5% at constant rates |
| Net cash from operating activities | £9.786bn | £8.996bn |
| Total borrowings, including leases | £43.968bn | £45.366bn |
| Net debt | £40.241bn | £42.574bn |
| Dividend per ordinary share | 215.6p | 210.4p; up 2.5%; 65% payout ratio |
Net finance costs rose 8.9% to £1.745bn, including £142m of net charges related to early bond redemptions and a tender offer. The tax charge was £2.108bn, with a 24.3% reported effective tax rate.
Cash and cash equivalents were £3.139bn; £1.333bn was restricted, principally due to Canadian creditor-protection proceedings and exchange controls. BAT reported £9.366bn of undrawn committed borrowing facilities, including an undrawn £6bn revolving credit facility and £3.4bn of undrawn bilateral facilities. Management stated it had sufficient financing for estimated requirements over at least 12 months.
Material changes versus the prior comparable period
- Currency translation reduced reported revenue by about 3.5%, offsetting underlying growth. Management estimated COVID-19 reduced revenue by approximately 2.5%, particularly through restrictions in South Africa and Global Travel Retail.
- Combustible revenue was £22.752bn, down 1.1% reported but up 2.8% at constant rates after adjusting for prior-period items. Cigarette volume fell 4.6% to 638bn sticks, compared with an estimated industry decline of 5.0%–5.5%; cigarette value share rose 20 basis points.
- New Categories revenue rose 14.9% to £1.443bn: vapour revenue increased 52% to £611m, modern oral rose 57% to £198m, while THP revenue fell 13% to £634m. THP revenue included a £50m charge related to withdrawing glo Sens and was affected by excise changes in Japan.
- Reported operating profit benefited from efficiency savings and from the absence of significant 2019 charges, including £436m related to the Quebec class actions and £202m for a Russian excise dispute. 2020 included £487m of litigation charges, £209m of goodwill impairment and £408m of restructuring and integration costs.
- Operating cash flow increased, supported by profit growth, working-capital movements and higher dividends received from associate ITC; cash conversion was 98%, versus 100% in 2019.
Outlook, management commentary and risks
Management’s medium-term targets, stated as post-COVID, are 3%–5% revenue growth and high-single-digit adjusted EPS growth at constant exchange rates. BAT reiterated a 65% dividend payout ratio and targeted adjusted net debt to adjusted EBITDA of about 3x by the end of 2021. These are targets, not guarantees. The Group also targets £5bn of New Categories revenue by 2025 and 50m non-combustible product consumers by 2030.
Project Quantum delivered £660m of gross savings in 2020; BAT aims for at least £1bn in annualised savings by the end of 2022. It invested an additional £426m in New Categories during 2020 and expects 2021 gross capital expenditure of approximately £700m. New Category products carry nicotine, are addictive and are not risk-free; US products are subject to FDA regulation, and BAT stated it would not make reduced-risk claims without agency clearance.
Key risks include tobacco and nicotine regulation, excise increases, illicit trade, declining cigarette consumption, foreign exchange, supply-chain disruption, cyber risk and the ability to commercialise New Categories. BAT filed US premarket applications for Vuse and Velo products; FDA progress updates were expected during 2021. The filing describes significant continuing litigation. In Canada, Imperial Tobacco Canada remains under CCAA protection and the stays on Canadian tobacco litigation were extended to 31 March 2021. BAT reported no provision for other Canadian tobacco litigation where a potential settlement could not be reasonably estimated. US MSA and state settlement obligations are substantial; 2020 included a £400m charge relating to claims over payment obligations for brands previously divested. Tax disputes also remain, including the Dutch assessments of £1.220bn; management stated it had not provided for them and believed it had defences.
The report states that KPMG gave unqualified opinions on the IFRS financial statements and internal control over financial reporting; management also concluded disclosure controls were effective at a reasonable-assurance level. The filing notes that forward-looking statements are subject to risks and that non-GAAP measures are not IFRS measures.
Most important facts an investor should verify
- Reconcile reported and adjusted results, including the impact of currency and adjusting items, and check the definitions and reconciliations of non-GAAP measures.
- Assess whether cash generation and available facilities support debt reduction, the 65% dividend payout and the 2021 deleveraging target; distinguish restricted cash from available liquidity.
- Track the outcome and financial exposure of Canadian CCAA proceedings, US MSA and state-settlement disputes, other litigation and material tax assessments.
- Monitor FDA review of Vuse and Velo applications, product regulation and whether New Categories growth can support the stated revenue and consumer targets.
- Compare subsequent performance with medium-term targets, while accounting for the ongoing decline in cigarette volumes, COVID-19 effects, pricing, excise and foreign exchange.