BATS earnings face 7% fall from Canadian lawsuit but full penalty unlikely, says Nomura

Commenting on news that a Canadian court has hit the subsidiaries of British American Tobacco, Philip Morris International and Japan Tobacco International with around C$15.6bn (£8.2bn) in fines, Nomura said BATS has the most to lose, although it's unlikely the full payment will be made.

“If the full payment needs to be made, there is the possibility that it bankrupts all of the tobacco majors in the market, with the payments dwarfing the annual operating profit,” said Nomura.

“However, as we understand, all of these companies are separate, ring-fenced legal entities, and therefore claims would have no impact at the parent level,” it added.

Nomura estimates that Canada makes up around 7% of BATS’ profit, around 3% of PMI’s profit and around 1% of JT’s.

The Japanese bank said there was still a possibility of the class action being rejected on appeal, potential declassification, or the awarded damages being reduced significantly.

In this respect, Nomura said it was important that the judge noted when giving his judgment that he did not want to see the tobacco companies go bankrupt.

Analysts saw the biggest near-term risk is payment of the provisional execution order. In terms of the potential impact on reported earnings per share on full-year 2015 numbers, this would be around 7% for BATS, around 1.5% for PMI and around 3% for JT.

“On an adjusted EPS basis, we continue to favour BAT and JT, where we see superior near-term organic growth performance as top-line momentum and self-help both support,” noted Nomura.