BAT sees tougher times ahead as profits rise 33%

British American Tobacco, the world's second largest tobacco group, beat expectations with a 33 per cent leap in first-half profits yesterday, but cautioned that global economic conditions were worsening.

BAT, which makes Lucky Strike and Rothmans cigarettes, believes that its broad brand portfolio and its wide spread of international business will cushion it from the worst of a recession. Martin Broughton, the chairman, expects BAT "to continue building sustainable shareholder value" despite having to "face the fact that economic conditions are deteriorating around the world".

The company set itself a good precedent in the six months to 30 June, reporting pre-tax profits of £936m, up from £706m, benefiting from lower exceptional charges.

Underlying operating profit was 11 per cent higher at £1.3bn, helped by exchange rate movements and a strong performance in the US. Its global cigarette volumes grew by 1 per cent to 399 billion sticks and increased its four global drive brands – Lucky Strike, Kent, Dunhill and Pall Mall – by 9 per cent.

Although more recession resilient than an industrial company, BAT's exposure to emerging markets concerned some analysts.

David Ireland, at ABN Amro, said: "BAT is still arguing they can grow at high single digit rates going forward, but I think that for the next few months the gradient is getting steeper." As economies increasingly come under pressure, consumers will have less money to spend, which will either affect BAT's volumes or its profit margins as consumers trade down to cheaper cigarettes.

Michael Smith, an analyst at Morgan Stanley Dean Witter, believes BAT's ability to increase prices will set it apart from the likes of the food giant Unilever and Diageo, the drinks group, if trading conditions worsen. "That's why this company can consistently grow earnings at double digit rates," he said. Mr Smith said BAT's stock could expect a further fillip from declining concerns about litigation.

BAT is expanding in Turkey – one of the 10 global markets that smokes more than 100 billion cigarettes annually – and Egypt. It plans to open a plant in China within two years, to counter a slowdown in markets such as the US and Britain.

A spokesman for BAT said the company was looking at ways to increase its current 15 per cent share of the world market. "There won't be another Rothmans," he said. "Most opportunities come from governments privatising their monopoly in national tobacco companies, such as Italy."

He said BAT had not been interested in Austria Tabak, which rival British tobacco group Gallaher bought in June in a deal worth £1.4bn.

BAT said it had exceeded its original synergy expectations of £250m from its takeover of Rothmans in 1999, saving more than £350m. However, final restructuring costs were also £150m higher at £550m. Its shares closed 3p higher at 563p.