British American Tobacco set for a stronger puff as new categories gain pace

Deutsche Bank upgraded British American Tobacco's (BATS) price target to 3,800p from 3,500p, anticipating a stronger second half of 2025 driven by recovery in the US combustibles segment and robust Velo nicotine pouch sales. BAT expects low single-digit revenue growth in New Categories for the first half, accelerating to mid-single-digit for the full year, fueled by Velo and the glo Hilo launch, despite regulatory headwinds in Asia-Pacific. This upgrade reflects growing confidence in BAT's diversification strategy towards non-combustible products, with the shares already trading above the previous target.

Analysis

British American Tobacco PLC (BATS) has received an upgraded price target from Deutsche Bank to 3,800p from 3,500p, indicative of a stronger second-half 2025 outlook and improved momentum in its New Categories division, which includes vapes and heated tobacco. According to BATS' first-half trading update on June 3, revenue is anticipated to be slightly ahead of expectations, primarily due to a recovery in the United States driven by both its traditional combustibles segment and strong sales of its Velo nicotine pouches. Globally, Velo remains a key growth driver in the New Category portfolio. However, performance is uneven, with solid results in the Americas and Europe (AME) contrasted by regulatory headwinds in Bangladesh and Australia affecting the Asia-Pacific and Middle East region. BATS projects low single-digit revenue growth for New Categories in the first half of 2025, expecting an acceleration to mid-single-digit growth for the full year, bolstered by Velo's global expansion and the launch of glo Hilo in heated tobacco. This trajectory supports BATS' strategic goal of generating half its revenue from non-combustible products by 2035, and with shares trading at 3,528p—already above the previous target—Deutsche Bank's revision suggests growing confidence in this pivot.

Key Decisions for Investors

• Investors should note the positive sentiment from Deutsche Bank's price target upgrade and BATS' own optimistic guidance on New Category growth, which may signal further upside potential for the stock.
• It is advisable to closely monitor BATS' second-half performance, specifically the sales traction of Velo and the newly launched glo Hilo product, to verify the projected acceleration in New Category revenues.
• Consider the ongoing regulatory challenges in the Asia-Pacific and Middle East regions as a key risk factor that could temper overall growth, warranting attention to any new developments in these markets.