British American Tobacco PLC

Overview Key strengths Key risks One of the largest tobacco and nicotine products manufacturer globally, with a portfolio of well-known brands Credit metrics remaining tight for the rating, with risks to deleveraging prospects in 2023 Highly profitable operations (EBITDA margin around 42-44%) thanks notably to high market share in the U.S. combustibles market Past and possible business growth prospects and profitability affected by changes in regulation, new excise duties, and litigation costs. Share of revenue from noncombustible products continuing to rise (15% of revenue in 2022), although below that of competitor Phillip Morris International Inc. Profits and cash flow from the cigarettes (combustibles) business, which has overall declining volume growth prospects Very large and stable free operating cash flow (FOCF)

...Rating headroom is tight following weaker-than-expected 2022 credit metrics, and the debt deleveraging trajectory in 2023 faces risks. At-end 2022, British American Tobacco PLC's (BAT's) adjusted debt to EBITDA rose to about 3.5x (from 3.3x in 2021) and funds from operations to debt fell slightly to about 18% (from 20% in 2021). Both metrics are weaker than our previous base- case assumptions published in February 2022. Nevertheless, we continue to forecast that S&P Global Ratings-adjusted debt to EBITDA ratio will decrease to close to 3.0x over 2023-2024. Fiscal year (FY) 2022 adjusted EBITDA was slightly up at about ú11.8 billion in 2022 (versus ú11.5 billion in 2021), supported by high and stable profits from its U.S. operations (59% of operating profit in 2022). In contrast, ú771 million worth of restructuring eroded profitability in its Asia-Pacific, Middle Eastern, and European markets. BAT also incurred about ú700 million of litigation costs in 2022 while its profitable, but relatively...

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