As at 2 June 2025

Executive Summary

1.    Declines in cigarette volumes do not seem to be mitigating, while the illicit vapour market continues to be worse than expected. However, the modern oral category is stronger than expected which partially offsets the other two issues.

2.    Key points in the investment thesis are:
a.    Management states that illicit vapour in the US account for 70% of sales and possibly 80%. The FDA is moving too slowly at the frustration of management. Aim for 50% smoke-free products by 2035.
b.    US cigarette sales surprised on the downside with volumes down in the high single digits in the past 18 months. This was against the expectation of 3-5%. Going forward it is expected at low single digits. Vapour revenue was down 5% against an expectation of low teen positive growth. 
c.    £900 million in share buybacks expected in FY25. This was before another 2.5% sale of the stake in ITC which will raise an additional £200 million in buybacks taking the total to £1.1 billion for FY25.
d.    NGPs still growing strongly and have turned to a profit. 46% modern oral growth for FY24 doesn’t seem to be slowing as Velo continues to take market share and NielsenIQ data shows a 4-week year-on-year volume growth of 249.7% on 22 March 2025. This should surprise on the upside in 1H2025.
e.    Company sitting on a dividend yield of 7.5% and forward PE of 9.5, 60% lower than Philip Morris.

Analyst thesis