Morning Note: Market news and updates from Becton Dickinson and BAT.

Market News

US equity markets ticked higher last night – S&P 500 (+0.1%), Nasdaq (+0.6%). This morning in Asia, markets were mixed: Nikkei 225 (-0.2%); Hang Seng (+0.6%); Shanghai Composite (+0.5%). TSMC affirmed hopes of an AI-Fueled 2024 recovery, reiterating its projections for a rebound this year. Indian stocks slid, erasing all of yesterday’s gains, while the rupee and bonds weakened as voting counts indicated Narendra Modi’s BJP-led alliance may only get a narrow victory.

The FTSE 100 is currently trading 0.5% lower at 8,244. UK spending growth slowed in May on rising bills and poor weather. LFL May retail sales only grew by 0.4%, well below the market estimate of 1.2%. A YouGov poll shows Labour is on track for an historic majority of 194 seats. Sterling trades at $1.2798 and €1.1744.

Brent crude has fallen to $77.30 per barrel, sliding for the fifth straight session to the lowest in four months amid concerns that global supply could increase later this year. The European gas prices surged as a Norway fault exposed supply fragility.

Gold prices hovered around $2,345 per ounce on Tuesday, after logging gains in the previous session underpinned by growing expectations of eased monetary policies by major central banks. Treasuries rallied, with the 10-year currently yielding 4.42%.

Companies globally raised $18.25bn in new convertible bonds last month, the highest volume since December 2021, according to data compiled by Bloomberg. ICR Capital said the surge is a harbinger of an “avalanche” of convertible issuance that’s likely to come over the next couple of years.

Source: Bloomberg

Company News

Yesterday lunchtime, Becton Dickinson announced the acquisition of Edwards Lifesciences’ Critical Care Product Group for $4.2bn. In response, the shares were marked up by 3% during US trading hours.

Becton Dickinson (BD) is a leading global supplier of medical devices and instrument systems. The group’s products help achieve better healthcare outcomes, mitigate healthcare cost pressures, and improve healthcare safety. 90% of revenue comes from products where the group is the market leader, with 85% from recurring or non-capital related purchases. As a result, the company is well placed to benefit from increased demand for healthcare from an ageing population and in emerging markets. In the near term, revenue growth will be, in part, dependent on improving patient admissions and surgical volumes and a stable capital investment environment.

The BD 2025 Strategy is targetting sustainable mid-single-digit revenue growth (i.e., 5.5%+), margin expansion of 540bps (to 25%), and double-digit earnings and free cash flow growth. The group is actively managing its portfolio – the diabetes care unit has been spun off and the surgical instrumentation platform sold. In addition, the group is exiting lower margin products and markets – the number of stock lines has been cut by 20%, achieving the 2025 target a year early, with further a further reduction expected. The result is a more simplified portfolio and increased efficiency able to drive improved operating leverage.

In addition to investing in organic growth opportunities, the group is also deploying capital on bolt-on acquisitions. The plan is to spend $1.5bn-$2.0bn per year on tuck-in deals, with a focus on ‘connected care’.

Yesterday, the company announced the purchase of the Critical Care business of Edwards Lifesciences. The business is a high-growth, innovative industry leader in advanced patient monitoring with advanced AI algorithms serving millions of patients globally. Critical Care invented the hemodynamic monitoring category, and its solutions are currently used in more than 10,000 hospitals globally to better understand the cardiovascular condition in real-time for critically ill patients, which helps improve outcomes. Hemodynamic monitoring and medication management technologies are often used simultaneously in the operating room or intensive care units, creating longer-term opportunities for meaningful innovation and interoperability across the care continuum.

The deal expands BD’s portfolio of smart connected care solutions with a complementary and broad set of leading monitoring technologies, advanced AI-enabled clinical decision tools, and a robust innovation pipeline. The portfolio includes the gold-standard Swan Ganz pulmonary artery catheter, minimally invasive sensors, non-invasive cuffs, and tissue oximetry sensors and monitors.

The acquired business will operate as a separate unit within BD’s Medical division. The combination is expected to unlock multiple new avenues for growth and value creation through BD’s broad global footprint, increased penetration across new and existing hospital customers, new innovation opportunities across data sets and platforms, and application of the BD Excellence operating system.

BD is paying $4.2bn for a business than generated $928m in revenue in 2023, implying an acquisition multiple of 4.5x. Over the last five years, the revenue CAGR has been around 7%, with 80% of revenue recurring.

The deal is expected to be immediately accretive to BD revenue growth, adjusted gross margin, adjusted operating margin, and adjusted EPS. Critical Care’s long-term financial profile is also expected to deliver durable revenue growth of 6%-7%, with year-one adjusted gross margin of at least 60% and adjusted operating margin of at least 25% that increase over time.

Additional margin expansion is expected to be generated from moderate synergies, primarily from cost of goods sold, supply chain efficiencies, and general and administrative expenses through BD Excellence operating system principles, while preserving Critical Care’s commercial and innovation resources.

The deal is expected to close by the end of 2024. BD expects to fund the all-cash transaction with $1bn of cash and $3.2bn of new debt. At closing, BD is expected to have leverage of 3x net debt to EBITDA and expects to de-lever to its 2.5x long-term net leverage target within 12 to 18 months of closing, primarily by deploying its free cash flows to debt repayment.

Although the deal is larger than the guidance for M&A spending, it is in line with the group’s strategy and represents an attractive addition to its stable of innovative products.

Source: Bloomberg

British American Tobacco has this morning released a trading update which highlights that year-to-date performance is in line with management expectations, leaving the group on track to deliver its full-year guidance. In response, the shares have been marked down by 1% in early trading.

BAT is a global tobacco company with more than 200 brands. The group has a Strategic Portfolio of priority brands made up of combustible tobacco products (including Dunhill, Kent, Lucky Strike, Pall Mall, Rothmans, Newport, and Camel) and New Categories (including vapour, tobacco heated products (THP), and modern oral, with brands including Vype, glo, and Vuse). BAT also owns a portfolio of other international and local cigarette brands.

The group’s aim is to progressively improve its performance to deliver 3%-5% revenue growth and mid-single digit adjusted profit from operations growth on an organic basis at constant currency by 2026. Further out, the group has also committed to ‘Building a Smokeless World’, with 50% of revenue derived from non-combustibles by 2035.

This morning, BAT has confirmed its full-year 2024 guidance for low-single digit revenue and adjusted profit from operations growth on an organic, constant currency basis. This is at a time when the global tobacco industry volume is expected to be down by around 3%.

As previously highlighted, the group expects its performance to be second-half weighted, mainly driven by wholesaler inventory movements related to continued investment in its US commercial actions, as well as the phasing of new launches. The guidance also reflects ongoing macro-economic pressures, particularly in the US and continued lack of effective enforcement against the growing illicit vapour segment. As a result, management expects H1 revenue and adjusted profit from operations to be down by low-single digits on an organic, constant currency basis.

In combustibles, US commercial actions are gaining traction despite a challenging macro-economic backdrop. The group is also enjoying volume and value share gains in the AME and APMEA regions, with robust H1 pricing. Overall, group cigarette volume share in key markets is up 30 basis points, while value share is down 10 basis points due in part to adverse geographical mix.

In New Categories, strengthening innovation is driving momentum. In the vaping category, Vuse is enjoying continued global value share leadership at 41.1% in key markets. After a period of disappointment, glo has started to deliver sequential heated tobacco category volume share improvement since January in key markets. In modern oral, Velo has generated strong revenue and profit growth, with continued leadership outside the US.

Overall, BAT remains highly cash generative and expects to deliver operating cash flow conversion in excess of 90% again in 2024 and be within its narrowed target leverage range of 2.0x-2.5x net debt/EBITDA by the year-end.

The company will continue to reward shareholders through strong cash returns, including a progressive dividend. In March, the group completed the monetisation of a 3.5% portion of its ITC stake, enabling the initiation of a sustainable share buyback programme, starting with £700m in 2024 and £900m in 2025.

Source: Bloomberg