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BAT Zimbabwe says challenges will remain in H2 after profit slump



British American Tobacco (BAT) Zimbabwe foresees reduced profitability at year end as the group does not expect the trading environment to improve in H2.

Managing Director Clara Mlambo told an analyst briefing for the half year period ending 30 June 2016 that group profit was impacted by some decisions on costs, but it will focus on sustaining the current level of volumes and profitability.

“We are not expecting much improvement in H2 as the challenges remain, but we will continue to focus on our three-year strategic thrust which is supported by our local brands Madison and Everest which commands 70% of the total cigarette market,” she said.

Commenting on the financials, Finance Director Lucas Francisco said during the interim period, revenue declined 33% to $16.77 mln from $21.80 mln the other comparative half period and this was attributed to sales volume drop of 21% across the local brands portfolio, which translated to 125 mln sticks.

According to Francisco, the volume decline was attributed to the constrained trading environment, affordability challenges faced by consumers and the accelerated liquidity crunch.

He said despite the decline, the company still remain the market leader with a market share of 80%. Dunhill volumes grew by 10% off a niche consumer base, boosted by the “Switch” variant.

“Despite all the negative outturn, we as management we are happy that we managed to produce a profit in this current environment, resulting in the company declaring a dividend of $0.18 cents,” he said.

Gross profit reduced by 26% to $11.9 mln largely on depressed volumes.  Selling and Marketing costs reduced 10% due to distribution efficiencies and cost containment initiatives whilst administrative expenses grew 36% due to costs associated with a staff rationalization exercise and the annualized impact of service fees from H2 2015 related to the ERP system.

Francisco said marketing activities for the period were focused on supporting local brands, Madison and Everest.

He said other income includes refund for erroneously charged duties and readjustment of provisions from prior year.


Operating profit reduced by 47% to $5.13 mln from $9.79 mln in 2015 same period whilst profit after tax declined 53% to $3.62 mln compared to $7.64 mln.


On the balance sheet, Francesco said inventory was in line with the trend in volumes and stock holding reduced by $ 2.3mln due to revised stock holding in light of the reduced sales volumes.

Trade and other receivables for the period reduced $3.6 mln due to implemented measures to reduce credit risk and reduced sales volumes.

Trade and Other Payables increased by $3.1 mln due to delays in obtaining exchange control approvals for payments to foreign suppliers whilst provisions reduced by $1.3 mln due to ESOT payments.

Francisco said in terms of Cashflows, net cash generated from operations decreased by $2.7 mln as a result of reduced profit and partially offset by improved debtors’ collections and reduced stock levels.

Net cash utilised in investment activities for the period was at $0.2mln which was mainly invested in trade vehicles replacement.  Net cash used in financing activities reduced by $ 4.4mln due to delay in remitting group dividends associated with delays in getting RBZ approval.

Meanwhile, Mlambo said the company continues to support tobacco production in the country, purchasing between 10%-12% of the total national tobacco crop.

Apart from that, the company also has a tobacco empowerment trust where it spend at least $500 000 per year.


Our thoughts.

The year 2016 has been marked by a myriad of economic challenges and the most notable ones being the excessive liquidity and cash shortages prompting the government to consider the introduction of bond notes. Bond notes planned introduction has been received with a lot of scepticism and this has further slowed down growth prospects for companies, as economic agents adopt a wait and see attitude. Therefore the weak financial performance by BAT in the first half of the year is not surprising.

Trade and other payables were $3.1mln higher as the company is still seeking permission from RBZ to remit international payments. Although they downplayed this issue we strongly feel that it has the potential to affect production in the future as the country continues to battle the issue of nostro accounts depletions.

The group’s profitability ratios were lower in comparison to the prior period due to depressed demand and cost cutting initiatives. We applaud the company’s continued efforts in addressing cost containment as the importance of cost rationalisation cannot be over-emphasized given the thin profit margins under the current operating environment.

In a move meant to reduce exposure to credit risk given the hostile economic environment, BAT downsized its trade and other receivables by $3.6mln and this in turn marginally lowered its liquidity ratios. The liquidity ratios however remain within acceptable levels given the illiquid market they are operating in. The balance sheet is pristine with no borrowing which is remarkable given that, a lot of companies in Zimbabwe are choking in debt.

While PAT was 53% lower, the company’s operating cashflows were only 23% lower due to improved debt collection efforts.

However on the valuation front, the company’s metrics (PE of 22x and PBV of 24x) are a bit steep at current levels compared with regional comparatives. These will however quickly unwind if the economic environment improves but the price is unlikely to go anywhere anytime soon. Investors in the meantime can enjoy the high dividend yield (6%). This has always been BATs attractiveness – its capacity to pay handsome dividends.



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