Yahoo Finance Questor: is BAT a massive value trap or an absolute steal?
A stock that comes with a predicted yield of nearly 8pc and a forecast price-to-earnings ratio of almost nine is either a massive value trap or an absolute steal.
Those investors who are looking for income, in an era when headline interest rates are hardly roaring higher from their record low of 0.1pc and 10-year government bonds, or gilts, offer a yield of barely 0.75pc, may be inclined to lean towards the latter view when they read the latest trading update from British American Tobacco.
Global tobacco industry cigarette or "stick" volumes are now seen coming in broadly flat, against earlier estimates of a 1.5pc decline, and BAT continues to take market share. Pricing trends for key brands such as Dunhill, Kent, Lucky Strike and Pall Mall also look positive.
In addition, Jack Bowles, the chief executive, is keen to emphasise the growth that the company is generating from next-generation products (NGPs). Customer numbers for heated tobacco (Vuse), vaping (glo) and oral products (Velo) are picking up momentum and BAT still says it is on target to generate £5bn of revenues here by 2025, compared with £1.4bn in 2020.
That reads well, especially when the company's "Quantum" programme provides further solace in the form of £1bn of cost cuts. Investors have, after all, been concerned about the decline of traditional tobacco products on one hand and whether NGPs can grow fast enough to compensate on the other.
In addition, BAT continues to generate cash, so debt is coming down and dividends should be well underpinned. Management is now even dropping hints about share buybacks (even if further debt reduction and more reassurance on the dividend would be this column's preference).
The stock is still a valid option for income seekers. Hold.
Questor says: hold
Ticker: BATS
Share price at close: £27.33
Update: Clinigen
This column must apologise for looking at Clinigen for the second time in three weeks, although the reason for doing so is a good one, as the unlicensed medicines specialist finds itself on the receiving end of a bid.
The company's board is recommending the 883p-a-share cash offer from Triton Investment Management. So far, so good from the point of view of our investment case, which is based on how the shares look good long-term value after a pair of near-term earnings disappointments. Better still, the shares are trading above the bid price, to suggest that someone somewhere thinks there may be a counter-offer.
The formidable hedge fund and activist investor Elliott, which has a stake of more than 10pc, has yet to say anything, at least publicly. Those of a nervous disposition may like to sell enough shares to cover the cost of their initial holding, just in case no one else elects to enter the fray, but our initial entry price of 586p in June means we are in for a decent payday if and when any deal closes.
The bid could crystallise the value we spotted. Hold.
Questor says: hold
Ticker: CLIN
Share price at close: 920p
Update: Zytronic
Rugged screen maker Zytronic's full-year results a week ago confirmed the promise of autumn's pair of upbeat trading statements. The Tyneside firm is back in profit, is returning to the dividend list and can point to bigger order books and profit margins.
Admittedly the shares did not respond with unfettered enthusiasm, perhaps over concerns that supply shortages could crimp the recovery in sales and profits, but at 168.5p they are already almost 40pc higher than their year's low of 122p and patience could yet see us get back to something akin to our entry price of 467.5p in July 2018.
The firm has no debt and a cash pile of £9.2m. That compares with a market value of £21m, so investors are effectively paying £12m for a business that in a bad year still produced £12m of sales and at its peak has generated £20m in sales, net income of £4.6m and a dividend of 22.8p a share. The smallest hint of a return to anything like those levels over time and the shares will look terribly cheap.
The outlook is far from clear but the valuation remains attractive. Hold.
Questor says: hold
Ticker: ZYT
Share price at close: 168.5p
Russ Mould is investment director at AJ Bell, the stockbroker
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