October 25, 2017 / 6:29 AM / 10 months ago

BAT targets doubling in vapour products revenue in 2018

LONDON (Reuters) - British American Tobacco (BATS.L) forecast revenue from its “next generation products” to double to more than 1 billion pounds next year as it sells vapour devices in more markets.

Revenue from devices such as e-cigarettes and those that heat tobacco without burning it should exceed 5 billion pounds ($6.6 billion) by 2022, the world’s biggest international tobacco firm said on Wednesday.

Although still tiny compared to traditional cigarettes, the vapour business should break even by the end of 2018 and deliver “substantial profit” by 2022, BAT said ahead of briefings for analysts and investors, helping to send its shares up 2 percent.

In Britain, where nearly 3 million people use e-cigarettes, a parliamentary committee launched an inquiry on Wednesday to examine the financial and health implications of the growing market for e-cigarettes, as well as the suitability of current regulations.

British charity Action on Smoking and Health welcomed the inquiry but cautioned that evidence must be seen in the context of long-used policies such as taxation and marketing regulations that have been reducing smoking rates for decades.

Makers of vapour devices and many scientists say they are less harmful than smoking cigarettes, but long-term studies do not yet exist.

Philip Morris International (PM.N) is ahead in the segment for tobacco-based products with its iQOS device, but BAT is trying to catch up with a device called glo. Whereas e-cigarettes use nicotine-laced liquid, glo and iQOS heat tobacco to a high enough temperature to create a vapour but not smoke.

FILE PHOTO - People walk past the British American Tobacco offices in London, Britain October 21, 2016. REUTERS/Stefan Wermuth/File Photo

Philip Morris has applied to U.S. health regulators to have iQOS recognised as having “modified risk” versus cigarettes.

The relative health benefit of heated tobacco products was questioned earlier this year in a study that found that they release chemicals linked to cancer, sometimes in higher concentrations than conventional cigarettes.

Shares in Philip Morris had grown 23 percent this year on the strength of iQOS, but then fell 4 percent since weaker-than-expected profit last week highlighted its continued dependence on traditional cigarettes.

In Japan, a key testing ground, BAT said glo has cornered 1.8 percent market share in a leading convenience store chain two weeks after its national roll-out. Glo will soon expand into Russia, its fifth country. Philip Morris has said iQOS would be in more than 30 markets by the end of this year.

BAT, which makes Lucky Strike and Dunhill cigarettes said it was confident about another year of “good” earnings growth at constant currency for the overall company, and at current exchange rates it sees a lift of 6.5 percent on operating profit and 5.5 percent on earnings per share, helped by a weak pound.

It said the pricing environment in a number of markets, particularly Russia, has been difficult, but recent developments were encouraging.

Jefferies analysts said in a research note that BAT’s medium-term estimates seemed “a bit light” given how fast the so-called vapour market is developing. BAT and rivals Philip Morris, Japan Tobacco International (2914.T) and Imperial Brands (IMB.L) are racing to deliver the best alternative to cigarettes as more people try to quit smoking.

($1 = 0.7568 pounds)

Reporting by Martinne Geller; Editing by David Holmes and Alexander Smith

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