Hello, welcome to Company Focus. My name Aamer Nawid, analyst at Fat Prophets, and this week I'm going to be taking a look at British American Tobacco. The company produced third quarter results this week.

Over recent months I think it's fair to say that risk appetite has returned to equity markets and defensive shares have taken a back seat and allowed more cyclical plays to take the big gains.

There have been exceptions, and British American Tobacco is one. Since May the shares have jumped by 22 per cent, as you can see from this chart here, taking the yearly gains overall to around about 19 per cent, showing that you don't need to sacrifice capital gains or share price appreciation in the pursuit of a decent dividend yield.

The group released third quarter results this week and, having said all that, the share price has actually had a bit of a wobble over recent days. Now, rather than anything to do with upcoming weakness in performance, I think it's more to do with a jittery equity market ahead of the Feds comments or actions next week.

So what did the third quarter results tell us? Well, not a great deal that we didn't already know about British American Tobacco and its product. Tobacco is recession resilient, not recession proof. Organic volumes fell by 3 per cent - that's for the first nine months of the year. And basically the company did actually manage to sell 526bn cigarettes and still managed to post overall growth in the global drive brands of around about 8 per cent. In addition to this, management have also recently stated that revenues are on the up and that's indicative of the strong, strong pricing momentum that its robust portfolio of products allows.

Results also showed us that Asia Pacific is a hot region for the company. Of the 526bn cigarettes they've moved, 141bn have been in that particular region. That's 5 per cent more than they managed to move in Asia Pacific last year. Now how much of that is due to a tax-induced Japanese buying frenzy is unclear.

Basically, earlier this month the Japanese government increased taxes on cigarettes by 40 per cent. This pushed cigarette prices up by a third, which basically meant that in the run up in September consumers went out and bought as many cigarettes as they possibly could do.

So that's produced a little bit of a spike in September's sales figures. But it's worth noting that on the flip side Pakistan is a key market for BAT and the devastating floods there have had a massively negative impact for sales numbers.

As this chart here shows, the tobacco sector has performed very well against the broader market. And if this momentum is to be continued the industry is going to have to overcome some pretty decent headwinds.

The Japanese tax hike is indicative, perhaps, of a trend that may continue. It's not the first country to do it and it won't be the last. Last year [ ] in Romania actually saw a doubling of cigarette prices. The net result there was an increase in illicit trade and that remains a massive concern for the whole industry. The black market comprises around about 12 per cent of cigarette sales globally, so they'll need to obviously address that.

Now BAT has embarked on an initiative with the European Commission to try and address the issue, but the company also has other concerns, such as high unemployment, advertising restrictions and smoking bans in key Western markets.

From where I sit, though, the pros outweigh the cons and I just think that maybe the fourth quarter may not see the positive favourable currency movements, as well as the Japanese lift. But I think looking beyond that emerging markets' exposure, a strong portfolio of products which span 250 across a variety of pricing points and a robust balance sheet will underpin earnings growth in the quarters beyond that.

At the last time of asking BAT had £1.5bn on the balance sheet, and that's plenty if they want to go and embark on any earnings accretive acquisitions which they did so effectively in Indonesia very recently.

Now obviously they've got the cash there as well to invest in innovating new products. They've just released this new menthol boost product which basically has an embedded capsule in it which, when pressed, releases a surge of menthol flavour to the consumer.

If products like this continue to gain market share the Group will be able to keep robust cash flows very strong, earnings very strong, be able to ramp up dividends even more. And the BAT shares, which currently yield around about 5 per cent in terms of a dividend yield, I believe will continue to set new highs over 2011 and beyond.

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