City forecast: British American Tobacco’s Russian exit in spotlight

Shareholders will be checking for any update on British American Tobacco (BAT)’s Russian exit as it reports on its progress so far this year.

The business is set to update shareholders on Thursday, months after the Kremlin launched an unprovoked invasion of Ukraine. Having lingered for a while after the conflict started, BAT announced in March that it would withdraw from Russia.

The company makes Pall Mall cigarettes and had a market share of around 25 per cent in Russia. It is looking for a buyer for its business, so any update will be of interest to shareholders.

They will also be on the lookout for any impacts the company sees from the cost-of-living crisis, although people have been found to keep on buying cigarettes even during a downturn.

But while sales might not face much of a hit, the company will still be wary about what it is paying to make its products. Raw material and labour costs have spiked in recent months. It could pass these extra costs on to consumers.

Oddly, the company is also helped if it wants to do this by the tax burden on cigarettes. Most of the cost of a packet is tax, so even if BAT passes on all its extra costs to buyers it will result in a much smaller percentage increase for certain products.

"Tobacco is a shrinking industry so the most important thing for BAT is that the group's squeezing every last pound out of its dwindling customer base," said Hargreaves Lansdown equity analyst Laura Hoy.

Investors will be keen to hear about how BAT is managing the decline of tobacco use through growth of categories including vaping. Picture: AFP via Getty Images.

"This is nothing new for BAT's investors, though inflation could exacerbate this. To that end margins will be the figure to watch as investors look for evidence of whether rising commodity costs are starting to eat into profits.”

When investors pick up the trading update on Thursday, many will search for information on the “new categories” business. This is, BAT hopes, the company's future. It built its business on tobacco, but in recent years it has been on a pivot towards different products.

They include a line of vapes, Vuse, which by one measure is the largest in the world, under-lip nicotine pouches called Velo, and heated tobacco products Glo.