Solid 2H for British American Tobacco, but Volume Decline Rate May Become a Concern

British American Tobacco, or BAT, reported slightly better preliminary 2022 results than we had forecast, thanks to slightly lower price elasticity in Europe than we had anticipated. Broadly, price increases were higher and volume worse than both competitors, notably Philip Morris International, or PMI, and our forecasts, but outside of Europe, price elasticity remained in line with our expectations. We are reiterating our GBX 3,900 fair value estimate of the ordinary shares, and although we think there is valuation upside to BAT, we have concerns that the business will be caught between a rock and a hard place in its drive to overhaul its portfolio while maintaining high levels of capital returns to shareholders.