BAT progress on sales and cigarette alternatives hits shares

By Martinne Geller

LONDON (Reuters) - British American Tobacco's weaker than expected 2017 sales growth and progress on next-generation products combined to send its shares down more than 4 percent on Thursday.

The company, whose brands include Dunhill and Lucky Strike cigarettes, is throwing itself into the fiercely competitive battleground of alternatives such as e-cigarettes and devices that heat tobacco without burning it, but it trails rival Philip Morris International on tobacco-heating devices that some see as more appealing to smokers.

BAT said that next-generation products contributed 500 million pounds of revenue in 2017, which was below analysts' expectation of 550 million. It also said it aims to double that this year to more than 1 billion pounds and to reach more than 5 billion pounds in 2022.

BAT reported full-year revenue up 37.6 percent at 20.29 billion pounds ($28.17 billion), shy of an expected 20.55 billion pounds, according to analysts at RBC Capital Markets.

Excluding the impact of last year's acquisition of Reynolds American and a weak pound, adjusted organic revenue rose 2.9 percent, also below analyst estimates. Adjusted volumes of cigarettes and tobacco heating products, meanwhile, fell 2.6 percent, which BAT said was less than the decline across the industry as a whole.

The contribution of BAT's Glo tobacco-heating product was small last year because it had been present in only a few markets and faced capacity constraints, BAT said, adding that it plans to bring it to 14 additional markets this year.

Adjusted earnings per share rose about 10 percent to 284.4 pence, excluding the impact of a gain related to the Reynolds deal and a deferred tax credit. That was ahead of estimates.

The company is again aiming for high single-digit earnings growth in 2018, in line with its ongoing ambitions, skewed toward the back half of the year, said Jerome Abelman, director of legal and external affairs.

Earnings will gain a 6 percent lift from the change in U.S. corporate tax, though the company expects half of this to be reinvested in the rollout of next-generation products.

BAT shares were down 4.8 percent to 42.35 pounds at 1023 GMT.

($1 = 0.7202 pounds)

(Reporting by Martinne Geller; Editing by David Goodman)