Feature of the week:
BAT Posts a 0.7% y/y Growth in After Tax Profits for 1H2021
British American Tobacco (BAT) posted a 0.7% y/y growth in after tax profits for 1H2021 to KES 2.7 billion. The growth was supported by higher gross revenues but dampened by higher operating costs.
Gross revenue edged up by 21.8% y/y to KES 20.3 billion (1H2020: KES 16.6 billion). This was attributed to the recovery of domestic sales volumes, excise-led price increases and sustained momentum on export sales.
Excise duty and Value Added Tax (VAT) increased by 26.7% y/y to KES 7.7 billion partly offsetting the growth in revenues. According to management, excise duty rates on cigarettes increased by 5.0% in October 2021 and this triggered price increases which generated additional pressure on consumer affordability. As a result, consumers substituted more expensive brands with lower priced ones. There was increased incidences of illicit trade in tax-evaded cigarettes.
Consequently, the net revenue grew at a slower pace of 19.0% y/y to KES 12.5 billion (1H2020: KES 10.5 billion).
Total cost of operations rose by 27.2% y/y to KES 8.6 billion. This was attributed to higher sales volumes and investments in portfolio transformation. The operating profit grew by 4.2% to KES 3.9 billion (1H2020: KES 3.7 billion).
Finance costs dropped by 39.5% y/y to KES 49.0 million (1H2020: KES 81.0 million).
The Board of Directors approved an interim dividend of KES 3.50 per share payable on 16th September 2021, with book closure date being 12th August 2021.
Commentary:
We are cautiously optimistic on the company’s top line growth on the back of recovery in domestic volumes supported by consistent growth in export volumes. The regulatory environment however still poses a risk to sales volumes, with tax increases encouraging the use of cheaper tax-evaded cigarettes. We opine that cost management would help cushion bottom-line performance in the short to medium term (not a sustainable way to create value in the long term).
The company remains a good dividend stock with a dividend yield of 9.8% (However, we always recommend investing on a total return basis – look at both the capital and income component of return). The recommendation is under review.
Equities Market Summary:
Nairobi Securities Exchange Performance
The All Share Index (NASI) and the NSE 20 Share Index edged up marginally by 0.2% w/w and 0.5% w/w to close the week at 178.98 and 1,981.91 respectively. Market turnover rose slightly by 0.4% to KES 1.8 billion while the volume of shares traded fell by 13.4% to 48.6 million shares. Notable price gains were recorded on Liberty Kenya (22.6% w/w to KES 9.56), B.OC (6.7% w/w to KES 67.25), Stanbic (5.7% w/w to KES 87.50), HF (4.1% w/w to KES 3.85), BAT (4.3% w/w to KES 457.00), I&M (3.0% w/w to KES 22.15) and Britam (2.4% w/w to KES 7.70). Safaricom rose slightly by 0.5% w/w to KES 42.80. BAT’s share price rose on the back of a KES 3.50 interim dividend announcement. We expect price stability in the coming week.
Recommendations:
EABL – Long-term Buy