Hello. Welcome to Company Focus. My name's Aamer Nawid. I'm an analyst at Fat Prophets. So this week, we're going to be taking a look at British American Tobacco and the major players in the tobacco industry.

Regular viewers would have seen that in my outlook for 2010, I stated that large companies operating in defensive areas with international exposure whose shares offer a decent dividend yield will find increasing favour through 2010. And so it's proven. Equity markets are keeping investors on their toes. However, the tobacco sector is seemingly moving forward in a much more calculated, measured and orderly fashion.

Although you can't dismiss the notion of a double-dip recession, I don't believe where the global economy is heading into one. That said, I think there are plenty of obstacles left before global health - economic health - is reached. I won't be surprised if equity markets come off again in light of maybe a threat of poor economic data, even though at the moment they look like they're challenging their 2010 highs.

With that in mind, I think it's pretty prudent to remain in defensive shares such as British American Tobacco, and the results sort of underscore why we remain quite bullish on the company.

Results for 2009 were recently released, and were put in the spotlight by Cantos in a series of interviews which I do recommend viewers get into if they want to just examine the nuts and bolts behind what was happening.

The bottom line was, though, that revenue ticked up by 17 per cent and profits also increased by over 10 per cent. And the company managed again to increase its dividend, no mean feat given the year that 2009 was.

So what were the drivers behind the performance? Well, you've got one of situations like favourable currency movements, but good pricing momentum, sort of a function of the addictive, I suppose, nature of the product, as well as the integration of some decent acquisitions, two of which were made in 2008 - one in Turkey, one in Denmark - followed by one in 2009 in Indonesia.

It wasn't all plain sailing, though. Volumes as a whole - organic volumes - dropped by 3 per cent and the company did see some weakness in certain brands. Given the year, again, that 2009 was, it was only inevitable that we saw sort of down-trading. We saw an increase in illicit markets, and we also expected to see some shrinkage there.

However, the key thing again, going back to the addictive nature of products, was that British American Tobacco could quite easily - and this is what they did effectively - just simply ramp up prices. And they posted an 8 per cent price increase for the year, which more than offset the fall in volume.

Acquisitions, as I stated, were central to the BAT's performance, and also the optimism going forward. The tobacco industry has seen a high degree of M&A activity over recent years, and I think given the amount of cash that's sort of kicking around, I think that's going to continue.

Events at Philip Morris, for example, say, 'Oh, the company itself was actually spun off from Altria in 2008." They recently announced a tie-up with Fortune Tobacco, the Philippines-based tobacco company. Now, the combined entity will control around about 90 per cent of the market in the Philippines, which is the 12th largest tobacco market globally. And this move comes after acquisitions in Columbia and Canada. So activity is ramping up.

Philip Morris is, of course, the owner of the Marlboro brand, which is the preferred choice of the still-smoking President Barrack Obama. And whilst British American Tobacco's results were stellar, Philip Morris's were also very, very good. Organic sales growth there actually posted an increase of 0.4 per cent versus obviously British American Tobacco's pull backwards.

Elsewhere, behind Philip Morris and British American Tobacco in terms of being the largest listed tobacco companies in the world, Japan Tobacco is in third place, controlling around about 17 per cent of the global market. And the company posted another resilient year. And sales volumes did come off by 2.5 per cent, but the company managed to increase its market share in every single market that it operates, apart from Taiwan. In the UK, smokers will be familiar with Benson & Hedges and Silk Cut, their brands there. And market share is up to around about 35 per cent.

Investors looking to sort of focus in on the UK-listed opportunities are usually faced with a choice between Imperial Tobacco and British American Tobacco.

Now, Imperial is the UK sort of focused leader, if you like - 45 per cent market share, brands such as Lambert, Butler, Embassy and Regal. Looking at the two together, I think it's no surprise to see why investors are prepared to pay a little bit more for the earnings of British American Tobacco. Balance sheets are really important these days, and here British American Tobacco has the advantage. Gearing is lower. Cash levels are higher. Interest cover is higher and the shares pay a better dividend.

In geographic terms, Imperial sources around about 80 per cent of its revenue from Europe, which is hardly a hotbed of economic optimism right now. BAT, on the other hand, has a far greater footprint in the Asia-Pacific region, Latin America and Africa and the Middle East, all significant growth areas.

In summary, 2009 has been a resilient year for the tobacco heavyweights. However, looking ahead, 2010 I do see them all benefiting from an improvement in economic conditions. There are challenges, though. Western markets, in particular, are going to be affected by - they're still being affected by high unemployment, restrictions on advertising, smoking bans. However, it's emerging markets where smoking is more a status symbol that the focus and the growth will emanate from.

British American Tobacco has a significant footprint and is highly active in these areas, and so although the company has reached its all-time highs in terms of share price, I see further significant further upside potential. The same could be said for the rest of the industry.

Thanks for watching. Make sure you tune in again next week.