British American Tobacco PLC

The stable outlook reflects our view that BAT will continue its deleveraging, thanks to its robust cash conversion. Under our base case, we expect the company to post adjusted debt to EBITDA below 4.0x at year-end 2019. To maintain the current rating, we consider the headroom for any negative deviation from our current base case as very limited. Over the next 24 months, we expect BAT to achieve and maintain adjusted debt to EBITDA within the 3.0x-3.5x range. We could lower the rating if BAT's adjusted debt to EBITDA does not fall below 4.0x at year-end 2019. In addition, we could also lower the rating if the company's performance does not meet our base-case assumption of BAT being able to

...British American Tobacco PLC (BAT) has sound cash flow conversion. In line with the company's guidance, we estimate BAT's annual cash flow available for debt repayment after dividend will be at least ú1.5 billion over the next three years. We expect annual discretionary cash flow of about ú1.5 billion in 2019 and ú1.6 billion-ú1.8 billion for 2020. The cash flow generated in the cigarette (combustible business) is mainly used to invest in new product categories and for shareholder distribution. Deleveraging has been slower than we expected. Due to adverse currency movements in 2018, BAT's deleveraging has been slower than our original expectations, with S&P Global Ratings-adjusted debt to EBITDA of 4.1x at the end of 2018. We expect the company to push this ratio below 4.0x in 2019, and continue to reduce it in 2020, thanks to continued good results in the combustible business and gradual increasing contribution from new categories. Exposure to regulatory and litigation risks remains a...

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