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USD Prev. 2015A Prev. 2016E Prev. 2017E Prev. 2018E
EBIT Margin -- 46.1% -- 48.3% -- 49.5% -- 50.6%
EBIT (MM) Adjusted
-- 8,701.0 -- 9,397.0 -- 9,817.0 -- 10,300.0
Organic Rev Growth
-- 5.1% -- 3.3% -- 1.9% -- 2.6%
EPS
FY Dec -- 2.80 -- 3.07 -- 3.36 -- 3.59
FY P/E 22.5x 20.5x 18.7x 17.5x
Price Performance
SEP-15 JAN-16 MAY-16 SEP-16
75
70
65
60
55
50
^Prior trading day's closing price unless otherwise noted.
COMPANY NOTE
Initiating Coverage
UK | Consumer | Tobacco 21 September 2016
Altria Group, Inc. (MO) Initiating at Hold: Expect more near term pressure than usual
EQ U
IT Y
R ESEA
R C
H EU
R O
P E
HOLD Price target $70.00
Price $62.97^
Financial Summary Net Debt (MM): $10,453.0
Market Data 52 Week Range: $70.15 - $53.68 Total Entprs. Value (MM): $133,496.4 Market Cap. (MM): $123,043.4 Shares Out. (MM): 1,954.0 Float (MM): 1,950.3 Avg. Daily Vol.: 5,689,715
Owen Bennett * Equity Analyst
+44 (0) 20 7029 8431 [email protected]
* Jefferies International Limited
Key Takeaway
We initiate coverage on Altria with a Hold, a target price of $70 and see 12 month TSR of c16%. We expect Marlboro share pressures to hold back EBIT development over the next 18 months. Although a heightened buyback with SAB cash and accretion from the holding in a larger ABI should mean earnings remain robust and limit de-rating risk, we believe multiple progression could be limited from here.
Marlboro share pressures to weigh on near term EBIT: We see Marlboro share loss into FY18 of 40bps (FY13-FY15 saw gains of 30bps). With investment ramped due to heightened competition, we expect limited bottom line benefit from the recent cost save program. We see organic EBIT growth slowing to 4.5% in FY17 from 8% in FY16.
Earnings to remain robust with SAB support: Despite a more muted EBIT outlook, FY17 EPS should see support from the SAB. We expect cash from the sale to lead to a heightened buyback and see associate income growing by close to 30%. We see FY17 EPS growth of 9.7%. Without the SAB support it would be 5.6%.
Long term outlook strong; well positioned for e-vapour growth: With competitive activity easing as of FY19 we see Marlboro returning to share gains. At the same time we see rapid acceleration in e-vapour industry volumes. With expected vapour market share of over 40% we see Altria well placed to benefit. The one negative relative to Reynolds is that we see much of the vapour growth driven by heat not burn, a segment in which Altria will be using PMI's product rather than having its own. E-vapour exposure could have important implications for terminal values used in the sector.
Div. yield the most attractive across the space: Altria's yield (over 5%) is the largest across global tobacco and is a spread of around 200bps on the 10 year govt. bond. With rates not set for significant upward movement over the next 18 months the offered dividend return should continue to support.
See multiple contained over next 12 months: While we believe current US domestic valuations can be justified (see sector note), we do see Altria as expensive relative to Reynolds. On a NTM PE it trades at a slight premium despite expectations of underperformance next 5 years. We expect the premium to reverse. De-rating risk is likely to be limited due to ABI/SAB benefits and the attractive dividend yield.
Valuation/Risks Our $70 10 yr DCF-driven PT implies NTM P/E of 20.0x vs Cons. 19.3x. Risks: No ABI/SAB deal, price competition/down-trading, federal tax increase, menthol ban.
Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 24 to 27 of this report.
This document is being provided for the exclusive use of JOANNA ZHU at HILLHOUSE CAPITAL MANAGEMENT LTD
Group P/E ratio
Source: FactSet
18.8x 19.3x
18.0x
14.6x
17.2x
20.6x 21.1x
21.4x 21.0x
12.0x
13.0x
14.0x
15.0x
16.0x
17.0x
18.0x
19.0x
20.0x
21.0x
22.0x
12 month TSR
Source: CapIQ, Jefferies estimates
T S R C a g r %
E B IT D A g r o w t h 4 . 2 %
M u l t i p l e c h a n g e 7 . 1 %
D i v i d e n d 4 . 1 %
B u y b a c k n e t 1 . 9 %
N e t d e b t / p e n s i o n - 0 . 7 %
A s s o c i a t e s 0 . 0 %
M I v a l u e g a i n 0 . 0 %
t o t a l a n n u a l T S R 1 6 . 7 %
Long Term Financial Model Drivers
FY16-F20 CAGR
Organic Revenue Growth 2.6%
Organic EBIT Growth 5.2%
Earnings Growth 7.8%
Other Considerations
- Sector maintains an attractive
dividend yield in a low interest rate
environment.
- Valuations should not be compared
to the past. Value drivers
fundamentally different (growth,
litigation overhang, vapour
contribution)
- Possibility of menthol ban or federal
tax increase over the period
Altria Group, Inc. is a holding company which engages in the production and market of
tobacco products. It operates through the following segments: Smokeable Products,
Smokeless Products and Wine. The Smokeable segment comprised of cigarettes
manufactured and sold by PM USA and machine-made large cigars and pipe tobacco
manufactured and sold by Middleton. The Smokeless products segment manufactured and
sold by or on behalf of USSTC and PM USA. The Wine segment producer of Washington
State wines, primarily Chateau Ste. Michelle and Columbia Crest, and owns wineries in or
distributes wines from several other wine regions. The company held around 51%
cigarette market share in the US as of FY15.
16Q3 results expected Oct 27th
Modified risk application for heat not burn
vapour (submitted end of FY16)
Catalysts
Target Investment Thesis
Marlboro loses 40bps of share over the
near term
Large part of near term cost saves spent
back
E-vapour category growth accelerates as of
FY19 with Altria over 40% share
Multiple contained due to Marlboro share
loss.
Target price of USD 70 implies NTM PE of
20.0x
Upside Scenario
Marlboro does not lose share in the near
term
Savings allowed to drop to bottom line
E-vapour growth accelerates sooner
Multiple sees further support
Would get to a price of 79 USD and
implied NTM multiple of 21.6x
Downside Scenario
Near term share losses greater than
expected
Investment increased to match that of
peers
E-vapour category growth stalls.
De-rating due to lost share and worsening
margins.
Would get to a price of 65 USD and
implied NTM PE multiple of 18.8x
Long Term Analysis
Scenarios
Company Description
T H
E L
O N
G V
IE W
Peer Group
Altria
Buy: $70 Price Target
FY16-FY20 EPS growth vs. NTM PE
Source: FactSet, Jefferies estimates
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
6.0% 7.0% 8.0% 9.0% 10.0%
PMI
MO RAI
BAT
JT
IMB
Recommendation / Price Target
Ticker Rec. PT
MO Hold $70
BATS LN Buy £58
IMB LN Buy £46
RAI Buy $61
PM Hold $96
2914 JP Hold ¥3664
MO
Initiating Coverage
21 September 2016
page 2 of 27 , Equity Analyst, +44 (0) 20 7029 8431, [email protected] Bennett
Please see important disclosure information on pages 24 - 27 of this report.
This document is being provided for the exclusive use of JOANNA ZHU at HILLHOUSE CAPITAL MANAGEMENT LTD
Executive Summary We initiate coverage on Altria with a Hold, a target price of USD 70 and see
12 month TSR of c16%. We expect Marlboro share pressures to hold back EBIT
development over the next 18 months. Although a heightened buyback with
cash from the SAB sale, and accretion from the holding in a larger ABI should
mean earnings remain robust and limit de-rating risk, we believe multiple
progression could be limited from here.
Marlboro share pressures to weigh on near-term EBIT: We see Marlboro share
loss into FY18 of 40bps (gains FY13-FY15 were 30bps). With investment ramped up in
response to the heightened competitive environment we also expect little bottom line
benefit from the recently announced cost save program (note we still expect investment
to trail that of peers). We see FY17 organic EBIT growth slowing to 4.5% from 8% in
FY16. Demographics and segment positioning should mean Marlboro Black (the driver of
all Marlboro share momentum the last few years we believe) is most pressured by Camel,
Marlboros dominance of full flavoured menthol is likely to cede share as Newport
addresses its under indexation, while the core Marlboro franchise is likely to suffer to
some degree from a more competitive Winston and Kool.
Earnings to remain robust with SAB support: Despite a more muted EBIT outlook,
FY17 earnings should see support from the SAB holding. We expect cash from the sale to
lead to a heightened buyback and see adjusted associate income growing by close to
30% due to the holding in the enlarged ABI. We see FY17 earnings growth of 9.7%.
Without the SAB support it would be 5.6%. Our associate income projection for FY17 is
based on our beverage analyst’s pro-forma deal estimates and includes a bullish outlook
for deal cost saves. They have in 3bn USD over four years vs. the market at 1.9bn USD.
Around 1.5bn are included in their FY17 net income (market at 500mn USD).
Long term outlook remains strong; well positioned for e-vapour growth: With
competitive activity easing as of FY19 we see Marlboro returning to share gains. At the
same time we see a rapid acceleration in e-vapour industry volumes. With expected Altria
vapour market share reaching over 40% we see Altria as well placed to benefit. While set
to make a loss of c136mn in FY16 (we estimate), we see Altria e-vapour EBIT at 214mn
USD in FY19, and rising to over 1bn by FY23. The one negative for Altria relative to
Reynolds is that we see much of the vapour growth driven by heat not burn, a segment in
which Altria will be using PMI's product rather than having its own (and will therefore
likely need to share some of the profits). E-vapour exposure could have important
implications for terminal values used in the sector as we could have a segment where
long term volumes are positive. For this reason we think it is important to value the
vapour business and cigarettes separately, applying different long-term growth rates.
See multiple contained over next 12 months: We believe current US domestic
valuations can be justified. Comparing valuations vs. the past are no longer relevant in
our view given the fundamentally more attractive value drivers. Adjusting for the
additional support, the underlying looks cheap. We discuss this is more detail in the sector
note. While comfortable with sector valuations, we do see Altria as expensive relative to
Reynolds. On a NTM PE it now trades at a slight premium to Reynolds despite expected
underperformance over the next 5 years. We expect the premium to reverse. Although we
see the multiple contained we see de-rating risk limited due to SAB support and attractive
dividend yield (a 170bps spread to the 10yr government bond vs. market of 40bps).
Valuation and risks: Our $70 10 yr DCF driven PT implies NTM P/E of 20.0x vs Cons.
19.3x. Risks: No ABI/SAB deal, price competition/down-trading, federal tax increase,
menthol ban.
MO
Initiating Coverage
21 September 2016
page 3 of 27 , Equity Analyst, +44 (0) 20 7029 8431, [email protected] Bennett
Please see important disclosure information on pages 24 - 27 of this report.
This document is being provided for the exclusive use of JOANNA ZHU at HILLHOUSE CAPITAL MANAGEMENT LTD
Investment thesis detail Below we examine each of the key points of our investment thesis in more detail. Many of
these areas are explored in more depth in our sector note.
A: Expect Marlboro share loss into FY18 of c40bps
Performance of Marlboro can impact valuation
Marlboro is the main driver of Altria value, making up c70% of overall EBIT we estimate. If
there are any signs of weakness on this brand then it will likely weigh on the multiple. A
good example of this is in 2011 when the brand came under pressure due to down-
trading. Between the end of 2010 and mid-2011, Atria’s PE re-rated 2.9% vs. Reynolds re-
rating of 9.6%.
Heightened competitive activity to weigh
We believe Marlboro will see share losses over the next 18 months as Reynolds and
Imperial become more competitive (Chart 1).
Marlboro Black, the main driver of Marlboro share momentum over the last few years (we
believe), is likely to become pressured from Camel, Marlboros dominance of full flavoured
menthol is likely to cede share as Newport addresses its under indexation, while the core
Marlboro franchise is likely to suffer to some degree from a more competitive Winston
and Kool.
Investment levels below those of peers (even with the recently announced cost save
programme) should also not help.
Note that as we move into FY18 and especially FY19, and competitive pressures lessen,
we see Marlboro becoming a share gainer again.
Chart 1: Recent and expected Marlboro share trends from a FY10 base
Source: Jefferies estimates
Marlboro Black likely to be impacted by heightened Camel strength
We believe the vast majority of Marlboro share gains over the last couple of years have
been driven by Marlboro Black, its demographic skew to ASU 30 and its positioning in the
menthol capsule segment (which we believe is growing double digit volumes) both
supporting.
MO
Initiating Coverage
21 September 2016
page 4 of 27 , Equity Analyst, +44 (0) 20 7029 8431, [email protected] Bennett
Please see important disclosure information on pages 24 - 27 of this report.
This document is being provided for the exclusive use of JOANNA ZHU at HILLHOUSE CAPITAL MANAGEMENT LTD
If Marlboro Black momentum stalls then the likelihood is so do share trends on the whole
of the Marlboro brand.
It is Marlboro Black we believe is most likely to be threatened from a more competitive
Camel.
Firstly, the brands share the most similar demographics, and secondly, they are the only
two brands competing in the growing menthol capsule segment, the primary source of
gains for both brands in recent years.
The correlation between Marlboro performance and Camel performance is illustrated in
Charts 2 and 3. When Marlboro has made gains, Camel has seen similar declines.
If we assume Camel sees strong share development over the near term, then we also
need to assume a large portion of these gains will come from Marlboro Black.
Chart 2: Trends of Camel and Marlboro in FY11, FY12 and
FY13
-80 bps
-60 bps
-40 bps
-20 bps
0bps
20 bps
40 bps
60 bps
80 bps
10 0bps
12 0bps
14 0bps
JAS 11 OND
11
JFM 12 AMJ 1 2 JAS 12 OND
12
JFM 13 AMJ 1 3 JAS 13
Camel M ar lboro
Source: Jefferies estimates, Nielsen
Chart 3: Trends of Camel and Marlboro in FY15. FY16
-40 bps
-30 bps
-20 bps
-10 bps
0bps
10 bps
20 bps
30 bps
40 bps
JAS 15 OND 15 JFM 16 8 w/e 1 8/06/16
Camel M ar lboro
Source: Jefferies estimates, Nielsen
Pressure as Newport addresses it under-indexation
Whereas awareness levels for Newport full-flavoured Menthol is at 87%, awareness for
non-full-flavoured menthol is c35%, and awareness for Newport non-menthol c40%.
Reynolds says that awareness for both of these SKUs should be c90%.
The reason awareness has been so low is their small size and lack of consumer
engagement. Sometimes these SKUs would not even be front of shelf, and where they
were still front of shelf, without active consumer engagement, consumers on the whole
have still not been aware of them.
The relative lack of awareness of these SKUs is reflected in their estimated share of
respective segments vs that of Newport full-flavoured menthol for which awareness is
strong (Chart 4).
With Reynolds now putting into place new consumer engagement initiatives that
Newport has never used before (digital interaction and face to face engagement) as well
as expanding distribution in areas where share is weak, we believe awareness levels (and
share) will start to rise.
MO
Initiating Coverage
21 September 2016
page 5 of 27 , Equity Analyst, +44 (0) 20 7029 8431, [email protected] Bennett
Please see important disclosure information on pages 24 - 27 of this report.
This document is being provided for the exclusive use of JOANNA ZHU at HILLHOUSE CAPITAL MANAGEMENT LTD
This data and likely outcome becomes more meaningful with regards to Marlboro (Chart
5) when you look at where its own strongholds are and where it is over indexed. Its
strength areas are where Newport weaknesses are being addressed.
A push back to this will likely be that Newport could just as well cannibalise Camel
volumes. We think there is less chance of this. Firstly, Camel is not really present in non-
full flavoured menthol non capsules (all its volumes in capsules), and in non-menthol, we
would argue Camel and Newport ethnic demographics would mean there is less of a
clash with Camel skewed more to Caucasian and Newport African American.
Chart 4: Newport share of segments and total share
63.3%
28.2%
2.9%
13.4%
0.0%
10 .0 %
20 .0 %
30 .0 %
40 .0 %
50 .0 %
60 .0 %
70 .0 %
Share of
premi um full
flavour m enth ol
Share of
premi um full
flavour m enth ol
- non capsules
Share of non
mentho l
To tal sh ar e
Source: Jefferies estimates
Chart 5: Marlboro share of segments and total share
23.8%
69.0%
78.1%
44.0%
0.0%
10 .0 %
20 .0 %
30 .0 %
40 .0 %
50 .0 %
60 .0 %
70 .0 %
80 .0 %
90 .0 %
Share of
premi um full
flavour m enth ol
Share of
premi um full
flavour m enth ol
- non capsules
Share of non
mentho l
To tal sh ar e
Source: Jefferies estimates
Winston and Kool skewed to the same demographics as the Marlboro core
While we believe it is Marlboro Black that has been driving all recent share momentum for
Marlboro, the core Marlboro franchise still makes up the bulk of volumes (over 80% or
more by our estimates). Given its significance, any weakness will be felt on overall brand
share trends.
Like Black is most susceptible to Camel strength, we think Marlboro core could face added
pressure from the increased Winston and Kool strength. The reason for this comes down
to demographics and segments once again.
In terms of demographics, it is widely accepted than the core Marlboro is more skewed to
adult smokers over 30. This is a legacy of the brand’s success in the past. It has become
difficult to attract younger smokers as many view the brand as “the cigarette your dad
smokes”. Our view is that this is one of the primary reasons Altria launched Marlboro
Black when the brand faced additional pressure during FY09-FY11 down-trading (it was
also launched at a cheaper price point that helped).
The extent of Marlboros unattractive age skew is part illustrated in Chart 6. We show two
numbers for Marlboro as one is given by Reynolds and the other is one provided by Altria.
While different, they both point to the same conclusion. Remember that these numbers
also include Marlboro Black. If we were able to strip Black out then the core skew would
likely look more unfavorable.
As the core is skewed to older smokers it is likely to compete with other bands that also
have an older demographic. Step forward Winston and Kool. While no specific market
data on these brands as shown in Chart 6, comments to us from industry participants
MO
Initiating Coverage
21 September 2016
page 6 of 27 , Equity Analyst, +44 (0) 20 7029 8431, [email protected] Bennett
Please see important disclosure information on pages 24 - 27 of this report.
This document is being provided for the exclusive use of JOANNA ZHU at HILLHOUSE CAPITAL MANAGEMENT LTD
such as “they have not had a young smoker in years” and witnessing one loyal older and
dad like Kool smoker in Simon Cowell, is enough for us to be confident in this view.
A more competitive Winston and Kool (which is already being shown to be the case with
recent share trends) should lead to added pressure for the core Marlboro. A likely push
back to this thesis from will be to look at Altria’s share during the period before the deal
completed. Despite Reynolds putting greater investment behind the brands to ensure
volumes did not fall below a certain level, Marlboro was able to take share.
What also happened at the same time, however, was almost complete neglect of
Reynolds’ other tail brands. We estimate these volumes were running down over 40% in
2015. Given that these are also largely skewed to older smokers, the main benefactor of
their declines would likely have been Marlboro.
Chart 6: Estimated indexation to ASU30 across brands
131 139
184
37
84
102
0
20
40
60
80
10 0
12 0
14 0
16 0
18 0
20 0
Reyno lds Newpo rt Camel Pall M all M ar lboro
Reyno lds
M ar lboor Alt ria
Source: Jefferies estimates
Even with costs saves, near term investment likely to trail peers
Cost saves from the recent Reynolds Lorillard deal should support a sizeable uptick in
investment over the next 18 months by both Reynolds and Imperial. While Altria’s own
recently announced cost save program was much needed therefore and should help to
close the gap, based on our estimates we still expect incremental investment to trail peers
in the near term (Chart 7).
This “investment gap” should come in as of FY19 and beyond as deal related cost saves at
both Reynolds and Imperial expire.
Chart 7: Estimated incremental investment per 1000 cigarettes across Altria,
Reynolds and Imperial FY15 FY16 FY17 FY18 FY19 FY20
Altria $1.33 $1.26 $1.10 $1.08 -$1.59 -$1.01
Reynolds organic $2.56 $1.56 $1.85 $1.79 -$0.85 -$0.16
Reynolds acquired (annualised) $2.79 $3.80
Imperial organic -$4.54 $3.84 $1.93 $1.81 -$1.23 -$0.48
Imperial acquired (annualised) $0.00 $10.68
Source: Jefferies estimates
MO
Initiating Coverage
21 September 2016
page 7 of 27 , Equity Analyst, +44 (0) 20 7029 8431, [email protected] Bennett
Please see important disclosure information on pages 24 - 27 of this report.
This document is being provided for the exclusive use of JOANNA ZHU at HILLHOUSE CAPITAL MANAGEMENT LTD
B: Marlboro share loss could weigh on pricing While a favourable overall industry pricing outlook is set to support (see sector note), due
to the expected share loss on Marlboro over the next 18 months, Altria pricing could be
pressured relative to Reynolds.
Declines in Altria premium volumes as a percentage of its portfolio should see negative
mix headwinds.
We illustrate the different mix outlooks in Charts 8 and 9. Based our estimated
manufacturer take across price points for FY16, and our assumed change in volumes, all
else constant we believe Altria’s mix headwind will be around 100bps into FY20.
Chart 8: Assumed mix impact at Reynolds FY16 Price
per 1000 FY16 Mix FY20 Mix
Premium NAS 175.5 6% 9%
Premium Camel 115.5 24% 25%
Premium Newport 154.0 41% 43%
Premium other 169.1 2% 1%
Value Pall Mall 100.0 22% 19%
Value Other 75.3 5% 4%
Price per 1000 130.7 133.3
Increase 2.0%
Source: Jefferies estimates
Chart 9: Assumed mix impact at Altria
FY16 Price
per 1000 FY16 Mix FY20 Mix
Premium Marlboro 132.5 85% 85%
Premium non Marlboro 224.3 5% 4%
Value 76.3 9% 10%
Cigars 300.5 1% 1%
Price per 1000 133.9 132.6
Increase -1.0%
Source: Jefferies estimates
C: Near term relative EBIT growth to disappoint Between FY10-FY14, Altria’s organic EBIT grew at the same rate as Reynolds (at 3.8%).
While Reynolds has not disclosed organic performance around the deal, in FY15 and FY16,
Altria’s growth has accelerated. FY15 it grew at 10.3% and we estimate FY16 growth at
8%.
With the share losses over the next couple of years and much of the cost saves being
reinvested into the top line, we see Altria’s EBIT growth slowing. We see FY17 growth of
4.5%.
This level of profit development is likely to disappoint the market when viewed both in
the context of Reynolds (FY16-FY18 growth expected of 7.6%) and also against its own
most recent trends.
D: ABI/SAB to mean earnings remains robust
Still expect FY17 earnings growth of 9.7%
While the near term organic EBIT outlook is expected to become pressured, we expect the
company to continue to deliver on its medium term earnings growth target of 7-10% as a
result of the ABI/SAB deal.
We see support for earnings through both associate earnings accretion and heightened
buyback in 2017 from the cash proceeds it receives as part of the deal (estimated at 3bn
USD pre-tax).
Based on our beverage analyst’s pro forma ABI deal P&L and assuming a 3bn USD
buyback in FY17 as opposed to 1bn USD (without a sale) we see earnings support of
3.8% (2.9% from associate earnings and 0.9% from the increased buyback).
We see FY17 earnings growth of 9.7%. Without the SAB support it would be 5.6%.
MO
Initiating Coverage
21 September 2016
page 8 of 27 , Equity Analyst, +44 (0) 20 7029 8431, [email protected] Bennett
Please see important disclosure information on pages 24 - 27 of this report.
This document is being provided for the exclusive use of JOANNA ZHU at HILLHOUSE CAPITAL MANAGEMENT LTD
Our ABI projections are more bullish than the market
Post the sale, Altria will hold a 10.5% share in a new enlarged ABI. Our associate income
projection for FY17 is based on our beverage analyst’s pro-forma deal estimates and
assumes the deal closes as of year-end FY16. Our beverage team is currently forecasting a
more bullish outlook for deal cost saves. They have in 3bn USD over four years vs. the
market at 1.9bn USD. Around 1.5bn are included in their FY17 net income (we believe the
market has 500mn USD).
Chart 10: Recent and expected Altria associate income
735
823
960 988
1057
877 892
1157
1291
1419
1526
40 0
60 0
80 0
10 00
12 00
14 00
16 00
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Source: Jefferies estimates
E: Increasing E-vapour contribution to support
The US the place to be for e-vapour value
The US is the largest e-vapour market in the world. To give some idea of its relative size,
the US makes up c20% of global retail value of cigarettes (ex China), but makes up c45%
of the e-vapour total. The best place to capture value from e-vapour development is the
United States.
Vapour category growth to accelerate as of FY19
We estimate the e-vapour business of Altria is currently making a loss and investment
behind the category has weighed on EBIT development to date.
Although current category growth has stalled, we expect it to accelerate again over the
next few years as product quality improves.
We expect growth to especially pick up as of FY19 when we believe heat not burn
products will receive modified risk approval. In our view (from trying these products
ourselves), heat not burn are more similar to smoking than anything on the market right
now. This, alongside FDA implied endorsement should see category growth benefit.
Altria’s positioning should provide support for the multiple
We believe the category will be dominated by Altria and Reynolds going forward. In
addition to already making strong share gains with their regular e-vapour products, we
MO
Initiating Coverage
21 September 2016
page 9 of 27 , Equity Analyst, +44 (0) 20 7029 8431, [email protected] Bennett
Please see important disclosure information on pages 24 - 27 of this report.
This document is being provided for the exclusive use of JOANNA ZHU at HILLHOUSE CAPITAL MANAGEMENT LTD
believe leadership position will be consolidated upon the introduction of heart not burn
as we do not anticipate peers to be in that space (or at least not on the same time frame).
As the category gains more traction over the next couple of years and Altria takes further
share we believe Altria’s multiple will see support.
Important implications for sector valuations
E-vapour exposure could have important implications for terminal values used in the
sector as we could have a segment where long term volumes are positive. For this reason
we think it is important to value the vapour business and cigarette businesses separately,
applying different long term growth rates.
For a more detailed discussion around why we believe long term vapour volumes will
remain positive, see our sector note.
A slight negative that Altria to use PMI’s heat not burn product
While we expect share levels at Reynolds and Altria to be very similar, the one negative in
terms of Altria valuations is that the heat not burn product it will be using will be that of
PMIs (IQOS) and as such it will likely have to share some of the profit.
Recent and expected Altria share profit development is shown in Charts 11 and 12. From
currently making a loss, we expect profit of close to 500mn by FY20.
Chart 11: Recent and expected e-vapour market share
Altria vs. Reynolds (estimates each year)
0.0%
5.0%
10 .0 %
15 .0 %
20 .0 %
25 .0 %
30 .0 %
35 .0 %
40 .0 %
45 .0 %
50 .0 %
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Altr ia Reyno lds
Source: Jefferies estimates
Chart 12: Recent and expected Reynolds e-vapour EBIT
progression (estimates each year)
-32
-275 -212
-136 -88
-16
214
471
-40 0
-30 0
-20 0
-10 0
-
1 00
2 00
3 00
4 00
5 00
6 00
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Source: Jefferies estimates
F: Current yield remains one of the most attractive In the current environment of low interest rates, dividend yield has taken on greater
importance in the minds of investors.
In this context Altria offers one of the most attractive returns across the US market with its
spread vs. the 10 year government bond approaching 200bps (Chart 13).
This positioning is also likely to improve over the next 12 months with an expected c15%
increase in dividend per share in FY17 (Chart 14) as we believe it will carry out a
heightened buy back with money from the SBA sale while maintaining an 80% pay-out
ratio.
MO
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Chart 13: Recent dividend yield spread vs. the 10 year
government bond (Altria, Reynolds, US consumer, S&P
500)
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
Altr ia RAI US co nsumer S&P 50 0
Source: Jefferies estimates
Chart 14: Recent and expected growth in Altria’s dividends
per share
8.7% 8.5% 8.3%
14.7%
0.0%
2.0%
4.0%
6.0%
8.0%
10 .0 %
12 .0 %
14 .0 %
16 .0 %
FY14 FY15 FY16 FY17
Source: Jefferies estimates
G: Valuation: premium to Reynolds to reverse
Comfortable with sector valuations …
We have showed in our sector discussion that while headline US domestic tobacco
valuations look expensive, given the shift in value drivers within the segment, underlying
multiples are actually relatively cheap.
... although we see Altria’s valuation as stretched within this
Within this, however, we believe the Altria multiple has become stretched, especially
given the differing medium term growth outlook vs. Reynolds. Its NTM PE is currently
trading at a premium to Reynolds.
With pressures building on Altria’s core business over the next 12 months we see the
premium with Reynolds reversing as Reynolds re-rates.
While risk of de-rating at Altria, other supporting factors (ABI, dividend, e-vapour) should
help to limit possible downside.
Altria line of best fit would also suggest the multiple has got too stretched
If we plot a line of best fit across global tobacco for FY16-FY20 EPS growth expectations
against current consensus NTM PE, then it would also suggest Altria’s multiple could
become increasingly pressured.
MO
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Chart 15: Cons. NTM PE premium/discount relative to
Reynolds
Source: Jefferies estimates
Chart 16: FY16-FY20 EPS growth vs. Cons. NTM PE
Source: Jefferies estimates
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Growth and returns breakdown Below we summarise recent and expected company performance. For a more detailed
review of growth trends across individual segments and their drivers, please see our
sector note.
A: Underlying TSR has been peer best
Returns over the last five years have averaged 22%
Altria’s underlying returns over the last five years have been peer best, coming in at
21.5% per year. Returns have also been fairly consistent with the number over the last 12
months almost identical.
Chart 17: Recent 5 year TSR across global tobacco
Source: Jefferies estimates, Company data, FactSet
Chart 18: Recent 1 year TSR across global tobacco
Source: Jefferies estimates, Company data, Factset
EBIT, yield and re-rating all contributing to recent returns
In Chart 19 we break out the drivers of recent TSR in detail.
Key points:
Robust EBITDA contribution: While not setting the world alight, Altria has shown
itself able to continually deliver steady and consistent EBIT growth over the period,
successfully responding to any pressures that may arise.
When we consider Altria’s skew to premium and the levels of down-trading we have
seen in both cigarettes and smokeless in the last five years, the ability to deliver
average EBITDA contribution of 3.6% is testament to the strength of how the
business is run.
Multiple re-rating: The biggest driver of TSR over recent years has been multiple
re-rating. In addition to the re-rating we have seen for the wide market and
consumer during the period, Altria’s multiple would likely also see support due to:
steady share gains over the period, easing litigation risk, recent strong macro
conditions, possible benefits from the ABI/SAB deal and options values around e-
vapour.
Various factors may have contributed to this trend: possible ABI/SAB deal accretion
from this and; market uncertainty around Reynold ability to integrate the Lorillard
business, and Altria’s relatively cheaper consensus valuation (vs. Reynolds) a year
ago.
MO
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Chart 19: Breakdown of recent 5-year and 1-year TSR
Source: Jefferies estimates, Company data, FactSet
B: Multiple to be contained over next 12 months While we see EBIT growth similar to the past, pressure on the multiple should contain
returns. We see 12 month TSR of c16%.
Key points:
EBIT growth pressured: While only a slight slowdown in the expected EBITDA
contribution over the next 12 months, when viewed in the context of the supportive
macro conditions and growth expected at Reynolds it could be seen as
disappointing. Reynolds’ expected EBITDA contribution over the next 12 months is
over 8%.
The relatively weaker outlook at Altria reflects increasing pressure on Marlboro share
over the next 18 months as Reynolds and Imperial become more competitive.
Further multiple expansion could be limited: Given the likely heightened
pressure on the cigarette business (and the main source of value, Marlboro), the
multiple should become more challenged over the next 12 months, especially given
expected underperformance vs. Reynolds. Altria consensus NTM PE has already re-
rated close to 6% over the last year vs. Reynolds slightly down.
We give the multiple some benefit as we expect there to be a boost around ABI/SAB
deal completion but downside risk is sizeable in our view
Dividend continues to support: Even with building pressure on the core business
the dividend will remain attractive and in the current environment should also help
to limit de-rating risk.
ALTRIA 5 Yrs ago Today ALTRIA 1 Yr ago Today
FWD EBITDA 7,629 9,900 FWD EBITDA 9,390 9,900
Fw d EV/EBITDA 6.9 10.9 Fw d EV/EBITDA 9.9 10.9
Fw d PE 12.5 19.2 Fw d PE 18.1 19.2
EV 52,266 108,123 EV 92,842 108,123
Net debt 10,792 11,909 Net debt 10,486 11,909
Pension 1,711 1,277 Pension 1,277 1,277
Associate value 14,585 25,240 Associate value 24,338 25,240
MI value 36 36 MI value 32 36
Equity value 54,312 120,142 Equity value 105,385 120,142
Shares 2,021 1,916 Shares 1,950 1,916
Share price 27 63 Share price 54 63
Dividend received 19,216 Dividend received 4,452
Buyback of shares over period 4,318 Buyback of shares over period 851
Share issuance 0 Share issuance 0
TSR Cagr% 164.5% TSR Cagr% 19.0%
EBITDA grow th 3.7% 28.6% EBITDA grow th 4.8% 4.8%
Multiple change 9.7% 74.2% Multiple change 9.7% 9.7%
Dividend 4.6% 35.4% Dividend 4.2% 4.2%
Buyback net 1.0% 8.0% Buyback net 0.8% 0.8%
Net debt/pension -0.2% -1.3% Net debt/pension -1.4% -1.4%
Associates 2.6% 19.6% Associates 0.9% 0.9%
MI value gain 0.0% 0.0% MI value gain 0.0% 0.0%
total annual TSR 21.5% total annual TSR 19.0%
MO
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Chart 20: Expected 12 month TSR across global tobacco
Source: Jefferies estimates
Chart 21: Breakdown of expected 12 month TSR
Source: Jefferies estimates
C: One-offs distort EBIT comparators in FY15/FY16 In the sections below, we look at recent and expected EBIT performance in detail.
It is important when assessing trends to do so in the context of Reynolds. As we discuss in
the Reynolds note, Reynolds’ performance in FY15/FY16 is heavily distorted by one-offs
around the deal (requirements around certain brands and FDA rulings).
In addition to these trends not reflecting Reynold’s true underlying performance in our
view, Reynolds has also not disclosed organic growth, so it’s impossible to verify our
estimates.
The other point we would add is that Altria’s own particularly strong performance in FY15
and FY16 would suggest some benefit from Reynolds’ one-off weakness.
For these reasons, to include FY15 and FY16 organic growth when comparing
performance across the two names would be unfair. We therefore focus on growth FY10-
FY14 and FY16-FY20.
D: Recent growth has been on a par with RAI Recent Altria EBIT performance is shown in Charts 22 and 23.
Ex FY15 (and the one offs) organic EBIT growth over the period was 3.8%. This was the
same as Reynolds.
ALTRIA Today 12 m onths
FWD EBITDA 9,900 10,359
Fw d EV/EBITDA 10.9 11.7
Fw d PE 19.2 20.0
EV 108,123 121,692
Net debt 11,909 12,789
Pension 1,277 1,277
Associate value 25,240 25,240
MI value 36 36
Equity value 120,142 132,831
Shares 1,916 1,892
Share price 63 70
Dividend received 4,985
Buyback of shares over period 2,333
Share issuance 0
TSR Cagr% 16.7%
EBITDA grow th 4.2% 4.2%
Multiple change 7.1% 7.1%
Dividend 4.1% 4.1%
Buyback net 1.9% 1.9%
Net debt/pension -0.7% -0.7%
Associates 0.0% 0.0%
MI value gain 0.0% 0.0%
total annual TSR 16.7%
MO
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Chart 22: Recent EBIT growth at Altria (FY10-FY15)
5.4% 5.1%
2.8%
2.1%
10.3%
0.0%
2.0%
4.0%
6.0%
8.0%
10 .0 %
12 .0 %
FY11 FY12 FY13 FY14 FY15
Organic 5 yr CAGR: 5.1%
Organic 4 yr CAGR: 3.8%
Source: Jefferies estimates
Chart 23: Contribution to recent EBIT growth at Altria
(FY10-FY15)
6786
87011869
280 212 22
60 00
65 00
70 00
75 00
80 00
85 00
90 00
95 00
10 000
FY10 Ci garettes Smo keless Vapour Ot her FY15
Source: Jefferies estimates
Segment commentary:
Cigarette growth between FY10-FY14 was 4.6%: We break down the drivers
of this 4.6% growth in Chart 24.
- Generally, Altria’s cigarette performance has remained strong over the period.
The biggest pressure came in FY11 when it was losing share due to significant
down-trading following the 2009 tax driven price increase (cost saves meant
this pressure was not reflected in EBIT growth).
Actions taken in 2012 addressed this weakness (greater promotions, launch of
lower costs variants of Marlboro, greater focus on L&M) and share recovered
from that point.
Despite the improved share and pricing as of FY12 in cigarettes, cigarette
growth did slow again in FY13 (and weighed on group performance) as industry
volumes slowed as e-vapour growth accelerated.
Cigarette growth for the four years was 5.0% FY11, 4.2% FY12, 2.4% FY13 and
6.7% FY14.
- Altria’s growth over the period compares to Reynolds at 7.5%. Looking at the
relative performances one may be led to believe Reynolds had the structurally
more attractive cigarette business. This is not actually the case.
Reynolds cigarette growth over the period was supported by sizeable cost
saves). Some of these came from productivity improvements (arguably easier for
Reynolds given its inefficiency during the period compared to Altria) but the
large portion were regulatory (Reynolds gaining extra benefit as it never
stripped MSA credits out of adjusted like Altria).
We estimate between FY10-FY14 Reynolds cost saves totaled around 12.3% of
FY10 sales. This compares to Altria at around 4.1%.
Cost saves at Reynolds disguised the much better top line performance of Altria,
reflecting its greater share momentum and stronger portfolio during the period.
Altria organic sales growth was 1.1% vs. Reynolds growth of -0.9%.
MO
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21 September 2016
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Chart 24: Breakdown of organic cigarette EBIT growth FY10-FY14
5,730
6,851
1,286
2,288 119
3 ,0 00
4 ,0 00
5 ,0 00
6 ,0 00
7 ,0 00
8 ,0 00
9 ,0 00
Base FY10 Vols Pri cing Non variable costs End FY14
Source: Jefferies estimates
Smokeless growth averaged 6.3% over the period: This compares to
Reynolds at 4.5%.
Growth between FY10-FY13 was over 7% but we then saw a period of slowdown
due to share loss around down-trading.
In response to the added share pressures, Altria has taken a number of actions to
reposition its portfolio stabilize share such as lower priced line extensions and new
packaging.
While share trends have now improved, the accelerated losses and weaker pricing
have weighed on recent smokeless growth. FY14 smokeless growth was at 3.3% and
was one of the factors contributing to the overall group slowdown in that year.
E-vapour weighing in FY13 and FY14: Vapour has weighed in overall group
growth in a couple of ways over the period.
- Firstly accelerated segment volumes weighed on cigarette industry volumes
(and growth) in FY13 (we spoke earlier how cigarette growth was 2.4% in that
year).
- Secondly, a sizeable ramp up in investment in FY14 weighed on group
performance.
While losses have lessened since the initial investment, the e-vapour business remains
a drag.
E: Looking at EBIT growth like for like We noted above how Reynolds’ organic cigarette growth FY10-FY14 was much more
favourable than Altria due to sizeable cost saves.
A large portion of these cost saves came from MSA rebates. The background to this is
discussed in more detail in the sector note and the industry litigation note.
These MSA rebates mean the headline organic comparators between Reynolds and Altria
are unfair.
While Altria received around 519mn USD of rebates during the period it stripped them
out from the adjusted number. Reynolds, however, received around 790mn USD (and
1.3bn into FY16), and only backed out around 217mn USD in FY13.
MO
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If we back out the Reynolds MSA rebates so like for like with Altria, the Reynolds four-year
growth comes in at 3.1%, so actually trailing that of Altria.
F: Near term share pressure to weigh from here As we look ahead, ex FY16 (and the one offs), we project organic EBIT growth between
FY16-FY20 of 5.2%.
While an improvement on the past as e-vapour growth supports, relative to Reynolds and
the the near term supportive macro it could be seen as disappointing in our view.
We expect Reynolds organic EBIT growth FY16-FY20 of 7.4%.
Chart 25: Expected EBIT growth at Altria (FY15-FY20)
8.0%
4.5% 4.9%
6.1% 5.5%
0.0%
2.0%
4.0%
6.0%
8.0%
10 .0 %
12 .0 %
FY16 FY17 FY18 FY19 FY20
Organic 5 yr CAGR: 5.8%
Organic 4yr CAGR: 5.2%
Source: Jefferies estimates
Chart 26: Contribution to expected EBIT growth at Altria
(FY15-FY20)
8701
11526
1551
550
682 42
80 00
85 00
90 00
95 00
10 000
10 500
11 000
11 500
12 000
FY15 Ci garettes Smo keless Vapour Ot her FY20
Source: Jefferies estimates
Segment commentary:
The big driver of the variance vs. Reynolds is expected to be cigarettes: We
break down the drivers of Altria’s expected cigarette growth in Chart 27.
- Altria’s cigarette growth is expected to be somewhat weaker than Reynolds over
the period.
While we now expect Altria to have a cost save advantage, Altria’s
underperformance reflects added near term share pressure as Reynolds and
Imperial get more competitive.
Although Altria’s cigarette top line has been much more impressive than
Reynolds in the past, we now see sales trailing. We look for organic Altria
cigarette sales growth over the period of 0.2% vs. Reynolds and 1.8%.
- Altria’s weaker relative cigarette growth is skewed to FY17 and FY18 as this is
when we see share under most pressure. We see two-year average cigarette EBIT
growth FY16-FY18 at Altria of 3.7% vs. Reynolds at 6.3%.
Beyond this (as investment intensity of competition tails off) we see Altria and
Reynolds cigarette EBIT growth as broadly similar (FY19-FY20 Altria growth at
3.0% vs. Reynolds at 2.9%).
Note that when cigarette industry volumes become pressured by e-vapour in
FY19 and FY20 (we see Altria cigarettes sales down -0.9% and -0.7%
respectively) we expect all players to pull back on investment to support
margins.
MO
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21 September 2016
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In Altria’s case (as it is not benefitting from cost saving to the same extent of
Reynolds currently) we believe it will put in place another programme in FY19
to further cushion the impact of worsening industry volumes.
Chart 27: Breakdown of expected organic cigarette EBIT growth FY16-FY20
8,023
9,150
2,209
2,890
445
5 ,0 00
6 ,0 00
7 ,0 00
8 ,0 00
9 ,0 00
1 0,00 0
1 1,00 0
Base FY16 Vols Pri cing Non variable costs End FY20
Source: Jefferies estimates
Smokeless should remain strong during the period: We look for four year
average smokeless EBIT growth of 7.0% vs. Reynolds at 7.4%.
Even though accelerated e-vapour growth should weigh on snuff industry volumes,
we believe this will be offset by greater pricing.
We should see significant additional value contribution from e-vapour:
We see category growth accelerating strongly over the period as of FY19.
By 2020 we see e-vapour EBIT profit at Altria at USD 471mn (remember currently
making a loss).
Although accelerated e-vapour growth will weigh on cigarettes (worsening cigarette
industry volumes), the additional vapour value should ensure overall group growth
picks up pace to over 6%.
MO
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Detailed market share projections
Chart 28: Recent and expected market share development split out across sub segments and brands Vols (Bn sticks)
Source: Jefferies estimates
FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E
Volum es
Industry 286.5 273.3 264.6 264.3 259.0 250.7 244.7 229.0 216.2
Premium 202.6 194.6 189.1 190.3 187.7 182.7 179.3 168.5 159.7
Menthol 68.1 65.6 64.9 66.0 65.7 64.5 63.8 60.1 57.2
Full Flavour 47.8 46.1 45.2 46.3 46.1 45.2 44.7 42.2 40.2
Non f ull f lavour 20.4 19.5 19.7 19.8 19.6 19.2 19.1 17.9 17.0
Capsules 7.5 8.9 10.0 11.2 11.9 12.7 13.3 13.1 12.8
Non capsules 12.9 10.6 9.7 8.5 7.7 6.6 5.8 4.9 4.2
Non menthol 134.5 129.0 124.2 124.3 122.0 118.2 115.4 108.3 102.5
Discount 83.9 78.7 75.5 74.0 71.4 68.1 65.5 60.6 56.5
Marlboro
Share of FF menthol 21.3% 21.9% 23.3% 23.8% 23.7% 23.6% 23.6% 24.0% 24.4%
Share of NFF menthol - capsules 0.5% 5.0% 15.0% 20.0% 23.0% 24.0% 26.0% 28.0% 30.0%
Share of NFF - non capsules 69.8% 69.8% 70.0% 69.0% 67.9% 66.9% 66.5% 66.4% 66.2%
Share of non menthol 78.6% 78.6% 78.1% 78.1% 77.7% 77.2% 76.9% 76.7% 76.5%
Share of menthol 21.6% 20.9% 22.4% 22.6% 22.3% 21.8% 21.8% 21.9% 22.2%
TOTAL SHARE 43.6% 43.7% 43.8% 44.0% 43.9% 43.6% 43.6% 43.7% 43.9%
Share of FF menthol 10.2 10.1 10.5 11.0 10.9 10.7 10.6 10.1 9.8
Share of NFF menthol - capsules 0.0 0.4 1.5 2.2 2.7 3.0 3.5 3.7 3.8
Share of NFF - non capsules 9.0 7.4 6.8 5.9 5.2 4.4 3.8 3.2 2.8
Share of non menthol 105.7 101.4 97.0 97.1 94.8 91.2 88.8 83.1 78.4
Menthol vols 19.2 17.9 18.8 19.1 18.9 18.1 17.9 17.0 16.4
TOTAL VOLS 124.9 119.3 115.9 116.2 113.7 109.4 106.6 100.1 94.8
Discount (L&M)
Share of segment 12.3% 13.5% 14.7% 16.1% 17.1% 18.4% 19.4% 19.8% 20.0%
TOTAL SHARE 3.6% 3.9% 4.2% 4.5% 4.7% 5.0% 5.2% 5.2% 5.2%
TOTAL VOLS 10.3 10.7 11.1 11.9 12.2 12.5 12.7 12.0 11.3
Other
TOTAL SHARE 3.2% 3.1% 2.9% 2.8% 2.7% 2.5% 2.4% 2.3% 2.1%
Com pany
COMPANY SHARE 50.4% 50.7% 50.9% 51.3% 51.3% 51.1% 51.2% 51.2% 51.2%
MO
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Financials
Chart 29: Altria P&L AY15A-FY19E
Source: Jefferies estimates
($m n) 2015A 2016E 2017E 2018E 2019E
Net Revenue 18,854 19,474 19,852 20,360 20,989
Costs (exc D&A) 9,928 9,852 9,814 9,841 9,845
Costs % sales 52.7% 50.6% 49.4% 48.3% 46.9%
Adjusted EBITDA 8,926 9,622 10,038 10,519 11,144
D&A 225 225 221 219 217
Adjusted OCI 8,701 9,397 9,817 10,300 10,926
Exceptionals
Implementation costs 0 0 0 0 0
Lawsuits 0 0 0 0 0
Asset impairment and exit charges 11 122 0 0 0
Goodwill impairment charge 0 0 0 0 0
Trademark impairment charges 0 0 0 0 0
Mark-to-market pension 0 0 0 0 0
Leveraged lease charge 0 0 0 0 0
Disputed cases 30 39 0 0 0
Restructuring charge 0 0 0 0 0
Reported OCI 8,660 9,236 9,817 10,300 10,926
Amortisation of intangibles 21 20 20 20 20
General corporate expenses 237 205 205 205 205
Reduction of Kraf t and PMI tax 41 0 0 0 0
UST transaction costs 0 0 0 0 0
Corporate asset impairment and exit costs 0 5 0 0 0
Operating incom e 8,361 9,006 9,592 10,075 10,701
Net Interest 817 791 732 821 836
Loss on early extinguishment of debt 228 0 0 0 0
Earnings f rom SAB Miller -757 -710 -1,157 -1,291 -1,419
Other income, net -5 -157
PBT 8,078 9,082 10,017 10,545 11,284
Tax 2,835 3,206 3,536 3,722 3,983
Tax rate 35.1% 35.3% 35.3% 35.3% 35.3%
PAT 5,243 5,876 6,481 6,822 7,301
Non controlling interests 2 3 3 3 3
PAT to Altria 5,241 5,873 6,478 6,819 7,298
Dividend Ratio Payout 81% 78% 80% 80% 80%
Dividend f or DPS Calc -4,255 -4,589 -5,182 -5,456 -5,838
DPS 2.17 2.35 2.70 2.88 3.10
Retained Profits 986 1,284 1,296 1,364 1,460
Earnings distributed for deferred -11 -12 -12 -12 -12
Basic EPS 2.67 3.00 3.36 3.59 3.87
Diluted EPS 2.67 3.00 3.36 3.59 3.87
Adjusted Basic EPS 2.80 3.07 3.36 3.59 3.87
Adjusted Diluted EPS 2.80 3.07 3.36 3.59 3.87
Basic average # shares 1,961 1,952 1,923 1,894 1,881
Diluted average # shares 1,961 1,952 1,923 1,894 1,881
Adjusted EPS Calculation
Net Income 5,241 5,873 6,478 6,819 7,298
Exceptionals 27 104 0 0 0
Tax Adjustment/Other 236 22 0 0 0
Rate Assumed 35.1% 35.3% 35.3% 35.3% 35.3%
Adjusted Net Income 5,504 5,999 6,478 6,819 7,298
MO
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Please see important disclosure information on pages 24 - 27 of this report.
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Chart 30: Altria balance sheet FY15A-FY19E
Source: Jefferies estimates
($m n) 2015A 2016E 2017E 2018E 2019E
Assets
Cash and Cash Equivalents 2,369 2,369 2,369 2,369 2,369
Trade Receivables 124 128 131 134 138
Inventories 2,031 2,098 2,138 2,193 2,261
Def erred Income Taxes 1,175 1,175 1,175 1,175 1,175
Other 387 387 387 387 387
Total Current Assets 6,086 6,157 6,200 6,258 6,330
Net PPE 1,982 1,952 1,929 1,914 1,906
Goodw ill 5,285 5,285 5,285 5,285 5,285
Net Intangible Assets 12,028 12,028 12,028 12,028 12,028
Investment in SAB 5,483 5,980 6,790 7,694 8,687
Other consumer assets 432 432 432 432 432
Financial services assets 1239 889 539 189 89
Total Assets 32,535 32,723 33,203 33,800 34,758
Liabilities
Accounts Payable 400 397 395 396 397
Tobacco settlement accruals 3,590 3,590 3,590 3,590 3,590
ST Borrow ing 4 4 4 4 4
Other current liabilities 3,084 3,084 3,084 3,084 3,084
Total Current Liabilties 7,078 7,075 7,073 7,074 7,075
LT debt 12,915 12,818 15,002 15,230 15,726
Def erred income taxes 5,663 5,663 5,663 5,663 5,663
Pension 1,277 1,277 1,277 1,277 1,277
Healthcare 2,245 2,245 2,245 2,245 2,245
Other consumer liabilities 447 447 447 447 447
Financial services liabilities 0 0 0 0 0
Total liabilties 29,625 29,525 31,707 31,937 32,432
Redeemable non controlling interest 37 37 40 43 46
Net Assets/Liabilites 2,873 3,160 1,456 1,820 2,279
Additional Paid - In capital 6,748 6,748 6,748 6,748 6,748
Acumulated earnings 27,257 28,541 29,837 31,201 32,660
Other reserve 0 1 1 1 1
Accuulated other comprehensive earnings -3,280 -3,280 -3,280 -3,280 -3,280
Share Issuance -27845 -28845 -31845 -32845 -33845
Non controlling interests -7 -5 -5 -5 -5
Stockholders Equity 2,873 3,160 1,456 1,820 2,279
Total Liabilities and Stockholders Equity 32,535 32,723 33,203 33,800 34,758
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Initiating Coverage
21 September 2016
page 22 of 27 , Equity Analyst, +44 (0) 20 7029 8431, [email protected] Bennett
Please see important disclosure information on pages 24 - 27 of this report.
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Chart 31: Altria cash flow FY15A-FY19E
Source: Jefferies estimates
($m n) 2015A 2016E 2017E 2018E 2019E
Cashflow from operations
Net Earnings 5,243 5,876 6,481 6,822 7,301
Adjusted for
D&A 225 225 221 219 217
Asset impairment and exit charges 0 0 0 0 0
Earnings f rom SAB Miller -757 -710 -1,157 -1,291 -1,419
Dividends f rom SAB Miller 495 213 347 387 426
Def erred tax -132 0 0 0 0
Other exceptionals 228 0 0 0 0
Other cash changes
Inventory -33 -67 -41 -55 -68
Trade Receivables 3 -4 -2 -3 -4
Trade payables -7 -3 -2 1 0
Income taxes -12 0 0 0 0
Accrued liabilities 199 0 0 0 0
Tobacco settlement 90 0 0 0 0
Pension 86 0 0 0 0
Other consumer, net 182 0 0 0 0
Financial services 0 0 0 0 0
Cash provided by Operating Activities 5,810 5,530 5,848 6,080 6,453
Cashflow from Investing
Investments, net 354 350 350 350 100
Capex -229 -195 -199 -204 -210
Purchase of businesses, net 0 0 0 0 0
Proceeds f rom sale of f ixed assets, net 0 0 0 0 0
Other, net -140 0 0 0 0
Cash used in Investing Activities -15 155 151 146 -110
Cashflow from Financing
Dividends paid -4,179 -4,589 -5,182 -5,456 -5,838
Share buy back -554 -1,000 -3,000 -1,000 -1,000
Repayment of debt -1,793 0 0 0 0
Other, net -221 0 0 0 0
Cash used in Financing Activities -6,747 -5,589 -8,182 -6,456 -6,838
Exchange Rate impact/other -19 0 0 0 0
Net cash m ovem ent -971 97 -2,183 -229 -495
Net debt m ovem ent -822 -97 2,183 229 495
Net debt opening 11,372 10,550 10,453 12,637 12,865
Net debt closing 10,550 10,453 12,637 12,865 13,361
MO
Initiating Coverage
21 September 2016
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Please see important disclosure information on pages 24 - 27 of this report.
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Company Description Altria Group, Inc. is a holding company which engages in the production and market of tobacco products. It operates through the following segments: Smokeable Products, Smokeless Products and Wine. The Smokeable Products segment comprised of cigarettes manufactured and sold by PM USA and machine-made large cigars and pipe tobacco manufactured and sold by Middleton. The Smokeless products segment manufactured and sold by or on behalf of USSTC and PM USA. The Wine segment producer of Washington State wines, primarily Chateau Ste. Michelle and Columbia Crest, and owns wineries in or distributes wines from several other wine regions. The company held around 51% cigarette market share in the US as of FY15. The company was founded in 1919 and is headquartered in Richmond, VA.
Analyst Certification: I, Owen Bennett, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Registration of non-US analysts: Owen Bennett is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may not be subject to the NASD Rule 2241 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst. As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgement.
Investment Recommendation Record (Article 3(1)e and Article 7 of MAR)
Recommendation Published , 00:06 ET. September 21, 2016 Recommendation Distributed , 00:06 ET. September 21, 2016
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Explanation of Jefferies Ratings Buy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period. Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period. Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-month period. The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or more within a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% or less within a 12-month period. NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/ or Jefferies policies. CS - Coverage Suspended. Jefferies has suspended coverage of this company. NC - Not covered. Jefferies does not cover this company. Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securities regulations prohibit certain types of communications, including investment recommendations. Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinions on the investment merits of the company are provided.
Valuation Methodology Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months.
Jefferies Franchise Picks Jefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selection is based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/reward ratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the number can vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason for inclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility in the bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intended to represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment style such as growth or value.
MO
Initiating Coverage
21 September 2016
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Risks which may impede the achievement of our Price Target This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may adversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities such as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.
Other Companies Mentioned in This Report • Anheuser-Busch InBev (ABI BB: €113.00, BUY) • British American Tobacco (BATS LN: p4,812.50, BUY) • Imperial Brands (IMB LN: p4,007.00, BUY) • Philip Morris International (PM: $99.21, HOLD) • Reynolds American Inc. (RAI: $47.66, HOLD)
Notes: Each box in the Rating and Price Target History chart above represents actions over the past three years in which an analyst initiated on a company, made a change to a rating or price target of a company or discontinued coverage of a company. Legend:
I: Initiating Coverage
D: Dropped Coverage
B: Buy
H: Hold
UP: Underperform
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Distribution of Ratings IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY 1091 52.33% 323 29.61% HOLD 842 40.38% 162 19.24% UNDERPERFORM 152 7.29% 16 10.53%
MO
Initiating Coverage
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Please see important disclosure information on pages 24 - 27 of this report.
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MO
Initiating Coverage
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Please see important disclosure information on pages 24 - 27 of this report.
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Initiating Coverage
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Please see important disclosure information on pages 24 - 27 of this report.
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