Analysts see upturn in BAT revenues

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Enacy Mapakame
Cigarette manufacturer, British American Tobacco (BAT), is projected to record a 19 percent jump in revenue to $43,7 million in the financial year 2018 as it rides on the current momentum.

Despite the challenging operating environment fast moving consumer goods (FMCG) are generally projected to perform well as consumer spending improves on the back of the anticipated growth in primary sectors such as agriculture and mining.

For BAT, earnings growth is hinged on increase in volumes and price stability as the company continuously employ its strategy adaptive to the trading environment in Zimbabwe.

Brokerage firm IH Securities contend despite the foreign currency challenges, BAT’s relationship with its sister companies in the region will play a critical in offsetting operational disturbances induced by liquidity problems.

Industry has lamented foreign currency problems, with some failing to secure essential raw materials.

“We project revenue to increase 19 percent to $43, 74 million in FY18 as momentum in earnings is projected to continue at the current run-rate.

“Despite mounting inflationary pressure in fast moving consumer good, an increase in stick prices is not in the short-term horizon as BAT continuously lobbies the Government to maintain the current $20/mille excise duty on cigarettes, according to management,” said IH Securities.

Volumes of sticks sales are anticipated to increase to 1,3 billion in financial year 2018 from just over a billion last year as 580 million sticks have already been sold in the first half of this current year.

Last year, low value brands experienced a 460 percent growth driving total volumes.
Earnings before interest, tax, depreciation and ammortisation (EBITDA) is projected to increase 30 percent year on year to $22,89 million and EBITDA margin of 52 percent from last year’s 47 percent, as the net effect of a revenue increase offsets the overall increase in costs.

Net income is seen increasing by 48 percent year on year to $15,65 million.
However, IH projects a 35 percent reduction in the BAT stock price to $16,37. BAT is currently the most expensive stock on the local bourse at $25,40.

What will drive the growth?
BAT has a task to safeguard its market share and maintain its position as the market leader in cigarette manufacturing in Zimbabwe.

Growth will also be supported by new offerings and revamped products as it consolidates its market share.

During the financial year 2017, BAT launched the Everest Spearmint while it continues to push its flagship brands, Madison and Everest.

In light of the new offerings, BAT is seen increasing its marketing strategies to expand its share, marketing costs are forecasted to increase 17,2 percent to $5,69 million.
IH Securities content the group’s cost reduction strategies are expected to be implemented in the current financial year which should work to its benefit.

This is despite increase in capital expenditure as the group embarks on automating its invoice system in a move to gain customer insight as well as enhance operational efficiencies.

“The percentage of selling and marketing costs to sales is expected to be maintained at 13 percent in line with the new route-to-market strategy as well as deliberate efforts to promote the company’s offerings in a bid to defend market share,” said IH Securities.

Half-year performance
In the half-year to June 2018, BAT maintained growth momentum from the second half of 2017 as it showed resilience of the business.

Revenue jumped 18,9 percent to $19,86 million compared to $16,7 million reported in the same period last year.

Profit after tax increased 60 percent to $7,42 million from $4,62 million while earnings per share increased 63 percent to 36 cents.

Total volumes increased 21 percent to 580 million cigarettes from 470 million cigarettes in the comparable prior year period as prices remained unchanged despite an inflation rate of 2,8 percent on prices of goods.

All segments recorded growth. Premium brand, Dunhill had a 37 percent growth, while value for money (VFM) brands and low value brands recorded an increase of 16 percent and 285 percent respectively.

Administrative expenses were 37 percent lower due as the company engaged in cost containment strategies.

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