British American Tobacco's half-yearly report confirms our thesis that a broad portfolio across a wide range of price points should allow the firm to perform relatively well in all economic conditions. We are maintaining our fair value estimate.
Excluding the effects of the acquisition of Bentoel in Indonesia, second-quarter volume fell 3% from the same period a year ago, as rising taxes forced retail prices higher, particularly in Romania, Turkey, Japan, and Pakistan. Nevertheless, the firm retained pricing power in many markets, and constant currency revenue grew 4% to £7.3 billion. Western Europe was again the firm's weak spot, with Spain, France, Switzerland, and Poland leading the way and the termination of the Gauloises distribution agreement causing a volume decline in Germany. The firm's first-half operating margin was flat year over year.
We anticipate further challenges in the remainder of 2010. Macroeconomic conditions are still unfavourable in many markets, and British American will face difficult comparisons with the second half of 2009, although the weak pound may provide some relief if exchange rates remain at current levels. Despite these headwinds, many of the issues affecting Western Europe are one-time or temporary events, such as high unemployment in Spain and the price shocks caused by excise tax increases. We think British American should perform in line with or better than the industry in the long term, and we expect historical industry declines of around 3% to resume in Europe next year.
