British American Tobacco (BAT) listed on the Nasdaq? That would look out of place. But some folks are taking this smoky speculation quite seriously.
It seems there is a notion that BAT should consider separately listing its new-generation products (NGP) segment — which I wrote about two weeks ago — on the Nasdaq. The NGP segment — comprising tobacco heated products (THP), vapours (e-cigarettes) and modern oral — is still running in the red after heavy investment on research & development, marketing and distribution.
But the business is growing rapidly. BAT CEO Jack Bowles recently reported that the NGP category grew revenue at 50% in the second half of the financial year to end-December, calling this a "great springboard moving forward". Specifically, BAT grew its THP category 59% in the second half, e-cigarettes by 45% and modern oral by 56%. It has indicated its NGP losses will diminish markedly in 2021, which seems realistic if BAT can start fattening its margin by continuing to build on market-leading positions across multiple geographies.
E-commerce is also now a key focus area, and the group increased e-commerce sales by 69% in 2020. The key rider is that profitability in e-commerce is more than double in the traditional key accounts. The theory around a Nasdaq listing would be that this tech-savvy/fad-fixated stock market might afford BAT’s NGP business a better rating than it has under the old group structure (still heavily dominated by the old cigarette business).
The question of a separate listing was raised at BAT’s recent investment presentation, with observations that "standard" e-cigarette companies were trading at "tech-like valuations". But executives nimbly skirted around the question. What Bowles did note was a bubble in e-cigarettes and other new product categories. "The reality is that you need a very strong foundation in terms of international footprint, you have to have capabilities — in other words the distribution in the 180 markets we are in." Frankly, I just don’t see BAT spinning off its NGP business in the short term, not while it has not reached breakeven.
On paper, there is merit in listing a 20%-35% minority stake in a newly formed NGP subsidiary. Expectations of a value uplift for BAT through such an exercise are reasonable, with the whiff of exuberance still hanging over the new tobacco category. But this value uplift might, I think, transpire in any event as the cash-generative traditional cigarette business smoulders away.
Show me the M&A
Speaking of value uplift, the market was not exactly cock-a-hoop over Grindrod’s final results to end-December. The core ports and terminals and logistics hubs performed commendably, but the much-rumoured sale of most of its private equity and private property portfolio fell through. So did plans to dispose of the marine fuels business, which has a not insubstantial carrying value of $28.5m.
In terms of the private equity and property portfolio, the plan now is to realise value by seeking individual deals rather than disposing of these interests through a single transaction. That means the value unlock in Grindrod — which could take the form of a share buyback or special dividend — will require shareholders to exercise more patience.
One placatory measure in the interim could involve corporate cousin Grindrod Shipping. Grindrod still owns roughly 10%, or 1.9-million, shares in Grindrod Shipping, which has seen a rebound in its share price in recent months as shipping rates have turned more buoyant. At the current price, Grindrod’s stake is worth about R185m. Some might regard that as chump change, but I reckon Grindrod Shipping’s share price might rally further. Banking R250m-plus might be a nice little windfall, and enough of a distraction from the prolonged (and increasingly frustrating) effort to sell other noncore assets.
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