BAT profit beats forecasts but target for smoking alternatives in doubt

British American Tobacco (BAT) reported a 1.3 per cent rise in half-year profit on Thursday, exceeding analyst expectations, but said it was likely to fall short of its 2025 ambitions on smoking alternatives.

While BAT is looking to grow its revenue from smoking alternatives, it still makes most of its money from tobacco. But in the US, a key market for all of its products, under-pressure consumers have been swapping from its more expensive cigarette brands to cheaper alternatives or vapes.

The maker of Dunhill and Lucky Strike cigarettes says a flood of illegal disposable vapes is also weighing on both its tobacco and vaping business in the US.

Chief executive Tadeu Marroco said that investments during its first half were helping BAT to recover US market share, but its business and consumers remain under pressure.

"I don't expect any major shift happening in 2024," he said of US consumer behaviour in a difficult economy, adding that a cut to interest rates is needed to lift sentiment.

The company is unlikely to meet its ambition to raise £5 billion in revenue from smoking alternatives by 2025 given the US is a key growth driver, he said.

Investors view BAT's ability to transition its business away from cigarettes towards alternative nicotine products such as vapes as critical in the face of ever-stricter regulation and growing awareness of health risks that are driving falling smoking rates in some markets.

Rival Philip Morris International is more advanced with such efforts. It raised its profit forecast on Tuesday, based partly on expected growth in its alternative products.

BAT posted adjusted diluted earnings for the six months to June 30 of 169.3 pence per share, against analyst expectations of 165.91 pence.

Organic revenue and organic adjusted operating profit fell 0.8 per cent and 0.9 per cent respectively. BAT had already flagged low single-digit declines.

The company reiterated that it expects an improved performance in the second half, leading to low single-digit revenue and profit growth over the full year.