Deutsche Bank raises British American Tobacco target to GBP38.00

Deutsche Bank raised its price target on British American Tobacco (BTI) to £38.00, reaffirming a Buy rating, after the company's pre-close update indicated stronger-than-expected first-half 2025 revenue, driven by a U.S. rebound and Velo's growth. BTI increased its full-year 2025 revenue growth guidance to 1-2% and will expand its share buyback program by £200 million following the $1.42 billion sale of a 2.5% stake in ITC. While analysts remain positive on BTI's profitability, challenges persist in the Asia-Pacific region and the vapor segment.

Analysis

Deutsche Bank has raised its price target for British American Tobacco (BTI) to £38.00 from £35.00, maintaining a Buy rating, following the company's first-half 2025 pre-close update which signaled revenue surpassing expectations. This optimism is largely fueled by an anticipated return to revenue and profit growth in the United States throughout fiscal year 2025, alongside strong performance from its Combustibles segment and Velo Plus. BTI exhibits robust financial health with an industry-leading 82.33% gross profit margin and a significant 6.17% dividend yield. While Velo demonstrates strong global growth, particularly outside the U.S. where it is the fastest-growing New Category segment, and the Africa, Middle East, and Eastern Europe (AME) region continues its robust performance, challenges persist in the Asia-Pacific and Middle East Africa (APMEA) region due to excise and regulatory issues, notably in Bangladesh and Australia. BTI projects low single-digit revenue growth for its New Categories in H1 2025, hindered partly by the U.S. illicit vape market, but anticipates acceleration to mid-single-digit growth by fiscal year-end 2025, driven by Velo's global expansion and the introduction of glo Hilo. Reflecting this positive trajectory, BTI increased its full-year 2025 revenue guidance to approximately 1-2% from a previous 1% and is expanding its share buyback program by an additional £200 million, funded by the $1.42 billion sale of its 2.5% stake in Indian conglomerate ITC. BofA Securities also reiterated a Buy rating with a £39.00 price target, highlighting improvements in U.S. combustibles and strong VELO growth, though acknowledging underperformance in the vapour segment which impacted overall New Categories revenue growth. UBS analysts suggest that new U.S. tariffs are unlikely to significantly disrupt the tobacco industry, with BTI's Vuse potentially facing a manageable 5-6% price increase given its domestic production focus. InvestingPro analysis indicates BTI shares appear slightly undervalued, with analysts maintaining positive forecasts for profitability this year, and the stock trading near its 52-week high after an impressive 34.44% year-to-date return.

Key Decisions for Investors

• Investors should consider BTI's enhanced growth outlook, driven by U.S. market recovery and strong Velo performance, alongside the shareholder value accretion from the expanded share buyback program.
• Closely monitor the New Categories segment's ability to achieve its mid-single-digit revenue growth target by year-end, especially given the underperformance of the vapor segment and U.S. illicit market challenges.
• Evaluate the persistent regional headwinds in APMEA against the company's overall resilience and the potentially limited impact of U.S. tariffs, factoring in BTI's current valuation, noted as slightly undervalued, its strong dividend yield, and high gross margins.