‘Smoking ban won’t choke BAT’

BRITISH American Tobacco Zimbabwe (BAT) will not be affected by international smoking bans and quotas, Old Mutual Securities (OMSEC) has said.
In an analysis of the company’s recently-released financials for the six months to June 2018, OMSEC said apart from the cigarette maker having a strong business model that has withstood Zimbabwe’s harsh economic environment, it also enjoys a huge market in the country.
“Risks faced by international tobacco companies related to smoking bans and quotas are unlikely to be felt by BAT in the medium to long term as the country relies heavily on the production and sale of tobacco,” OMSEC said.
It, however, said the company’s dialogue with government remained key in ensuring limits on excise duty increases going forward.
“We are of the opinion that the company should focus their dialogue with the government on dealing with informal entrants who have the potential to price them out of their market share given their ability to undercut BAT’s products’ prices by evading taxes,” OMSEC said.
The advisory firm said it believed BAT had also benefitted from their customers’ adaption to cashless payment methods, and had reclaimed lost market share.
BAT said its strategy in the outlook was to focus on the company’s strategic pillars to hedge the current constraints in the market, that is, efficient route to market, cost management, maintaining a strict control environment and price stability.
Part of this will entail automation of their invoicing, challenging the cost base and engagement to maintain excise duty at the current level.
The company has hired a technical expert to demonstrate and appropriately articulate the overall positive impact of the BAT business on the overall economy.
The organisation anticipates that the results from this exercise which highlights amongst other things fiscal tax contribution, Gross Domestic Product and employment sustenance as well as supplier support will allow a more positive conversation with regulators and tax authorities to enable a better trading environment for the company.
OMSEC said it took two methods to arrive at BAT’s fair valuation.
One was the discounted free cash flow valuation method which values BAT at 1,954 cents/share and a 24 month average price earning valuation puts it at 2,431 cents/share.
“We took an average valuation of the two and we believe that BAT’s current price of 2,540 cents/share provides a potential downside of 13,7 percent to our mean valuation of 2,193 cents/share. That being said, long term investors are better holding onto the stock given its potential for capital appreciation and dividend income streams in the long term however short term investors could reduce exposure to the share in search of other under-priced assets,” said OMSEC.
On the Zimbabwe Stock Exchange, BAT has an average market capitalisation of $492 million.
During the six months to June 30 2018, the company’s average value of daily trades improved from $22 417 to $80 625. In terms of market weight, BAT remains a blue chip company accounting for 5,4 percent of market share, down from the 7,2 percent it averaged last year.
“In terms of returns, the company has a negative return of 28,9 percent as the price adjusts downwards from the all-time rally high achieved in November last year. Its current returns do not fare any better against the negative returns arising from industrial and sector indices of 15,4 percent and 9,8 percent respectively,” OMSEC said.
The return on equity for the company has been on a growth trend over since 2015. The growth is attributed to growth in profitability and aggressive dividends that have maintained the company’s equity position relative