British American Tobacco (BAT) Kenya registered a 22.5% y/y growth in after tax profits for FY2018 to KES 4.1 billion (FY2017: KES 3.3 billion).
The rise in profits was mainly attributed to a 5.9% y/y rise in gross revenues to KES 36.5 billion steered by excise-led price increases (in Kenya and its export markets) and increased sales volumes of semi-processed tobacco (cut-rug). The company delivered strong performance despite a difficult operating environment in both the local and export markets. Sales volumes in Kenya were weighed down by reduced demand (owing to the excise led price increases) and increased competition from illicit trade, whose incidence rose to 14.1% in December 2018 from 12.4% in December 2017.
Some of the challenges experienced in the export market include; the political tension and unrest in DRC Congo and Somalia, heightened regulations in Mauritius, Uganda and DRC and illicit trade in Uganda. Owing to the reduced sales volumes in Kenya, excise duty and value added tax eased marginally by 0.3% y/y to KES 15.7 billion. The net revenues increased by 11.1% y/y to KES 20.8 billion (FY2017: KES 18.6 billion).
According to the company, the cost of operations expanded by 9.1% y/y to KES 14.5 billion, driven by higher cut rug sales volumes, portfolio investments, higher input costs (driven by inflation) and the full year impact of incremental cost of tax stamps. Despite the rise in operating expenses, BAT Kenya’s operating profits edged up by 16.0% y/y to KES 6.2 billion.
Consequently, the operating profit margin, rose by 130 bps to 30.0% due to the higher rise in net revenues compared to operating expenses. Finance costs eased by 31.6% y/y to KES 338.0 million as the company reduced its reliance on overdraft facilities, given the improvement in operating profits and working capital management.
We note with concern on the rise in competitive pressure from other cigarette manufacturers (Philip Morris – a global tobacco firm is set to acquire a 51.0% stake in Mastermind) and illicit trade (especially in Kenya).