Market Commentary:
- The All Share Index gained by 0.9% w-o-w to close at 165.55. The NSE 20 Index however declined by 0.1% w-o-w to 1,888.47. Market turnover and volume of shares traded increased by 19.0% and 6.9% to KES 2.4 billion and 72.5 million shares respectively.
- Large cap counter saw price gains on the back of increased investor demand: KCB (+3.9% to KES 39.50), Equity (+1.6% to KES 38.45), Bamburi (+3.9% to KES 40.05) and BAT (+14.1% to KES 484.75). BAT edged up significantly following positive FY2020 results with a 34.3% y/y increase in dividend to KES 45.00 (dividend yield at 9.3%). We expect market activity to remain relatively high in the coming week. We also anticipate some profit taking activities on Safaricom, Equity, KCB and BAT.
News Highlights:
BAT Posts a 42.0% Growth in After Tax Profit for FY2020
- British American Tobacco (BAT) Kenya reported a 42.0% y/y increase in after tax profit for FY2020 to KES 5.5 billion (FY2019: KES 3.9 billion). The increase in profitability was primarily due to higher export revenues, lower excise duty and Value Added Tax (VAT) and lower cost of operations.
- Gross revenue declined by 2.5% y/y to KES 38.9 billion (FY2019: KES 39.8 billion). According to the company, the dip was due to a 24.0% y/y decrease in domestic sales arising from the adverse economic impact of the COVID-19 pandemic, excise-led price increases which eroded consumer affordability and illicit trade in Kenya.
- However, the decline in domestic sales was cushioned by higher export sales and a 14.5% y/y dip in excise duty and VAT (mainly due to the lower VAT in 2020 of 14.0% from 16.0%). As a result, net revenue grew by 5.4% y/y to KES 25.3 billion.
- The cost of operations eased by 3.1% y/y to KES 17.8 billion (FY2019: KES 18.3 billion). According to management, this was driven by pro-active cost saving initiatives undertaken to cushion business profitability from the impact of the pandemic. Consequently, the operating profit margin rose to 29.9% (FY2019: 23.8%).
- Finance costs declined by 10.4% y/y to KES 173.0 million from KES 193.0 million in FY2019.
- According to management, the company invested significantly in a new factory based in Nairobi to manufacture oral nicotine pouches as part of its commitment to reducing the health impact of its business. The sale of the pouches was however stopped by the Ministry of Health on grounds that it illegally licensed.
- The company has proposed a final dividend of KES 41.50 per share (FY2019: KES 33.50) giving a total dividend of KES 45.00 (inclusive of the interim dividend of KES 3.50).
Commentary:
- The performance is impressive given the challenging economic environment. However, we note with concern the rise in illicit trade. Further, we note that regulatory challenges on the sale of the nicotine pouches remain a key risk to revenue growth. The Lyft product was launched to support revenues, given the shifting consumer trends (focus on health) and declining global consumption. According to management, the company has opened talks with the government on reversal of the ban.
- We opine that BAT is a good dividend stock for investors as it has had a consistent dividend payout of 86.0% for the past 5 years, which has not been affected by the pandemic and a high dividend yield (currently 9.3% based on the FY2020 payout).
Recommendations:
Kenya Re – HOLD