[Intl-tobacco] BAT: Hi earnings, giving up on China

[Robert Weissman]

UPDATE 3-Tobacco firm BAT earnings near top of forecasts
February 28, 2006

(Adds company, analyst comments, detail, updates shares)
By Mark Potter

LONDON, Feb 28 (Reuters) - British American Tobacco Plc (BATS.L: Quote,
Profile, Research) posted 2005 earnings near the top of analysts' forecasts
on Tuesday, boosting its shares as strong growth in emerging markets offset
tougher trading in Canada and Japan.

The world's second-biggest cigarette maker behind Altria's (MO.N: Quote,
Profile, Research) Philip Morris also confirmed it had abandoned plans to
expand in China, but said it could participate in possible privatisations of
state tobacco firms in Egypt and Turkey.

British American Tobacco (BAT), whose top four cigarette brands are Lucky
Strike, Kent, Dunhill and Pall Mall, said adjusted earnings per share (EPS)
rose 17 percent to 89.34 pence last year, helped by strong growth in Latin
America, Africa and the Middle East, as well as from associate companies.

Forecasts ranged from 86.4p to 89.5p, according to a Reuters poll of six
analysts.

Michael Prideaux, BAT director of corporate and regulatory affairs, said the
firm was keeping its target of increasing earnings on average by a high
single digit percentage.

"Performing above trend for one year does not automatically result in a new
trend," he told Reuters. "Our goal is on average a high single figure
increase in EPS and we're very confident we can continue to do that."

Some analysts were more upbeat.

"There's very impressive momentum in the business," said JP Morgan's Michael
Smith, keeping an "overweight" rating on BAT shares.

At 0930 GMT, the shares were up 3.3 percent at 13.72 pounds, one of the
biggest risers on the benchmark FTSE-100 <.FTSE> index and valuing the firm
at 29 billion pounds ($50.4 billion).

BAT, which makes cigarettes chosen by one in seven of the world's one
billion adult smokers, is more geographically spread than many rivals,
making it less vulnerable to action to curb smoking in individual countries.
Continued ...

Earlier this month, British lawmakers voted to ban smoking in pubs, clubs
and indoor public spaces in England. BAT is much less exposed to the UK than
rivals Gallaher Group Plc (GLH.L: Quote, Profile, Research) and Imperial
Tobacco Group Plc (IMT.L: Quote, Profile, Research).


CHINA

BAT confirmed on Tuesday it had finally abandoned plans to expand into
China, the world's most populous country.

"A couple of years ago, we thought we were on the verge of doing something
significant (in China), but that's turned out not to be the case," Prideaux
said in a telephone interview.

China said earlier this month it would not allow new cigarette factories or
joint ventures with foreign partners.

Prideaux said BAT would continue to look to expand, and could participate in
possible privatisations of state tobacco firms in Egypt and Turkey.

"We'll certainly be having a close look," he said.

He was less enthusiastic about a deal to tie up with another major tobacco
firm, as sometimes touted in the media.

"We don't think there's any shareholder value in any of the normal things
one reads about," Prideaux said.


BUYBACKS AND SAVINGS

BAT, which also makes Rothmans, Peter Stuyvesant and State Express 555
cigarettes, said volumes of its four global brands rose 9 percent on a
like-for-like basis in 2005.

The firm raised its 2005 dividend 12 percent to 47p a share and said it
would continue to buy back shares in 2006.

Prideaux said BAT would probably buy back close to the 500 million pounds of
shares purchased in 2005.

The firm also raised the amount of money it hoped to save from overheads and
indirect costs to an annual sum of 400 million pounds by 2007, from 320
million previously.

It expected to deliver further supply chain savings as well, but Prideaux
declined to say whether this meant more factory closures and job losses.

Prideaux said higher taxes in Canada had driven a shift towards cheaper
brands, but that BAT had responded by moving into that part of the market.

"Obviously, it's never going to be as profitable as it was, but the worst
should be behind us," he said of Canada.

BAT shares have outperformed UK sector peers <.FTASX3780> by about 7 percent
over the past 12 months and trade at about 13.7 times 2006 earnings
forecasts, broadly in line with Gallaher Group and Imperial Tobacco,
according to Reuters data.

"They've got a strong growth outlook...and probably ought to be at a bit of
a premium to the sector," said Morgan Stanley analyst Jonathan Fell, with an
"overweight" rating on the stock.

http://today.reuters.com/investing/FinanceArticle.aspx?type=marketsNews&stor <http://today.reuters.com/investing/FinanceArticle.aspx?type=marketsNews&stor>
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BAT Raises Target for Cost Savings 25% to 400 Million Pounds - Bloomberg
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British American Tobacco Posts Profit Drop - AP
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