BAT dividends stuck in RBZ priority queue as profits drop in F16


BAT dividends stuck in RBZ priority queue as profits drop in F16

HARARE – Cigarette manufacturer, the British American Tobacco Zimbabwe (BAT) has now accrued three dividend payments that it is failing to remit to major shareholder as a result of delays in making foreign payments by local banks.

This is despite the fact that dividend payments to external shareholders are on the Reserve Bank of Zimbabwe (RBZ) priority list of foreign payments. Finance Director Lucas Francisco said the company is in queue to remit in excess of $5 million to its major shareholder.

“We have not been able to remit dividends for F15, 1H16 and now full year 2016 whose payment is due in May,” he said adding that the company is currently conversing with the major shareholder and local banks in that regard. For the period, the company proposed a final dividend of 33 cents per share and together with the interim dividend 18 cents brings total dividend for 2016 to 51 cents.

The company according to Francisco is struggling to import raw materials though it has enough cover in terms of raw materials

Meanwhile, Francisco told analysts that revenue for the year was 25% below prior year at $34.06 mln compared to $45.26 mln in 2015 mainly due to a decline in sales volumes. Local sales brands declined 21.5% from same period in 2015 while the Global Drive Brand, Dunhill grew 7.2% on prior year driven by a small but growing consumer base.

He said the company however continues to invest in selling and marketing activities which saw marketing costs increasing 9% in the year to $4.08 mln from $3.73 mln in prior year in order to defend the sales volumes. Administrative expenses declined 3% at $10.375 mln compared to $10.66 mln in 2015 as a result of the annualized benefits of a staff rationalisation that happened in 2015 and reduction on management fees. Gross profit at $24.734 mln was 24% below prior year’s $32.373 mln mainly driven by reduced revenues.  Consequently, profit for the year was lower at $8.47 mln on 2015’s $15.47 mln.

Commenting on the balance sheet, Francisco said inventory reduced by $1.2 mln driven by changes in the leaf purchasing cycle while Trade and Other receivables reduced by $3.6 mln impacted by property sales proceeds which were received in 2016 and improved debtors’ collections. Cash and Cash Equivalents increased $8.5 mln due to challenges in paying suppliers and remittance of dividends as Trade and Other Payables increased by $4.9mn due to shortages of foreign currency.

The FD said net cash generated from operations decreased by $1.9 mln to $13,343 mln mainly driven by low profitability which was offset by a decrease in working capital driven by lower stocks, debtors and increase in payables.

Managing Director Clara Mlambo said while trading conditions remained challenging throughout the year, the company had the agility to survive. She said at half year 2016 profitability was $3.6 mln, but a strong second half performance saw H2 contributing 56% of total revenue contribution resulting in improved profitability. “As a result of increased sales and marketing activities, sales picked in December 2016 as a result we are proud of this commendable profit in this kind of trading environment,” she said.

Mlambo said the company managed to hold on to its market share despite a marginal 1% decline to 79% from 80% in prior year. “We saw a number of new entrants and growth of duty non paid cigarettes mainly on the lower base thus with pressure on consumer disposable incomes, that is where the shift is,” she said.

She said during the year BAT managed to tweak prices in order to maintain volumes and market share particularly on the Madison brand.

Mlambo said trading conditions are expected to remain challenging, particularly in view of the foreign payment challenges and continued strain on disposable income. She said while the company sources the bulk of its raw materials locally, it has a special raw material that is not available in Zimbabwe, thus is in constant engagement with banks in order not to disrupt production

Mlambo said BATZ continues to support government’s position to maintain excise, at the current rate as this allows pricing stability and volume recovery. Currently excise duty is pegged at $20 per 1000 sticks and has not changed over the past two years.

She said going forward the company will continue focusing on its key Strategic Leadership pillars to grow volumes and deliver value in 2017. These are Portfolio – Route to Market – Effective Cost Management and Control Environment.

She said BAT continues to fully comply with the laws of the land including SI 264/2002 and Indigenisation legislation. The company will be submitting to government for review its two year indigenisation compliance certificate which expires at the end of 2017.

“BAT Zimbabwe will also continue to carry out empowerment programmes through the Tobacco Empowerment Trust which is currently supporting 133 students at Chaminuka Centre in Mount

Darwin and the extension of programme up to 2020,” she said.

Our Thoughts on BAT

The economy underperformed to post a GDP growth of 0.8 percent, which was below target in F16 and this is reflected BAT’s 2016 financial performance. Profitability declined but as has come to be expected the company stuck to its dividend policy albeit under a very challenging operating environment.  although the directors managed to declare a dividend. BAT has managed to deliver a remarkable set of results under a challenging operating period

Return on sales declined significantly to 35 percent in 2016, from 46 percent in 2015mas some inefficiencies have started to creep in. The 21.5 percent decline in the volumes of local brands while the company’s global drive brand, Dunhill, grew by 7.2 percent points to how demand is more elastic on the lower end smokers and the total opposite on the higher end. As local consumers’ disposable incomes deplete, they tend to either reduce consumption or switch to cheaper substitutes offered by competitors.

BAT demonstrated its market dominance by looking at its contribution to total excise duty collected in the first 10 months of 2016, where it contributed $15.9 million out of the total excise of $18 million paid by players in the sector. However, using the excise duty statistics to measure market share may not reflect an accurate position due to the presence of duty non-paying cigarettes whose impact the group is still to fully recognise and to tackle head on.

Government’s ability to deal with the growth in duty non-paying cigarettes will therefore be important in helping BAT to grow its sales going forward. But we all know Government can only do little as they also do not have effective monitoring mechanisms. Further, competition is growing in the sector, a new company, Gold Leaf Tobacco is planning to set up a plant in Zimbabwe within two years, having already launched its Rudland and George cigarette brand last year. There are also prospects of Chinese investors establishing a tobacco manufacturing plant in the medium term. This will bring more variety and might eventually eat into BAT’s lion’s share of the market.

Further, while the company says that the package of its cigarettes to make them available in smaller packs will require capital investment, it will continue to lose out consumers who usually buy single sticks, two-packs or five packs. The majority of the company’s cigarettes are bought in 10-packs, which disadvantages someone with less than a dollar in their pocket but wants to buy BAT cigarettes. Most formalised vendors do not sell BAT brands as single sticks from open packs due to legislation which restricts the practise. Section 7 of Statutory Instrument 264 of 2002 on Public Health (Control on Tobacco) Regulations 2002 says that: “No person shall sell or distribute any tobacco or tobacco products to any person except in a container”. The lack of convenience packs, like two-packs, for random smokers with no preference tend to result in the company losing sales to competitors and the sooner the company has a strategy for this the better.

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