Duty hikes to affect BAT volumes

VOLUMES at the Zimbabwe Stock Exchange-listed cigarette producer, British American Tobacco (BAT) will remain under pressure until the second half of 2021 as recent excise duty hikes may trigger price increases, according to advisory firm IH Securities.

BAT reported a 12% slowdown in volumes during the year ended December 31, 2020 after the domestic market was affected by a slide in disposable incomes after Covid-19 forced firms to shut down and send staff home.

In a review of BAT's financial statements, IH said while the government had been rolling out a vaccination programme to reduce infections and avoid lockdowns, the firm's most immediate headwinds would come from duty reviews.

"Despite vaccine rollout efforts to push back against the Covid-19 pandemic and expectations of significant liquidity injections due to a rebound in consumer spend from the summer crop marketing season, it is our view that on a combination of the lockdown in the 1Q21 (first quarter of 2021), which reduced activity in recreational areas, and a review of excise duty from a fixed rate of ZWL$100 (about US$1) per 1 000 cigarettes to the equivalent of US$5 per 1 000 cigarettes likely necessitating further price increments - volumes are looking to remain under pressure at least through the first half of the year as demand remains elastic," IH said.

"Barring any further lockdowns from a possible third wave of Covid-infections, we however believe volumes will gain momentum especially in the second half of the year to FY21 (financial year 2021)," IH said.

BAT's revenue increased 40,36% to $2,07 billion (about US$23 million) during the review period from $1,47 billion (about US$16 million) during the comparable period in 2019, driven by price increases and earnings from cut rag tobacco exports.

"In March 2020, the company started exporting cut-rag to generate foreign currency that is required to continue with normal operations of the business," BAT chairperson
Lovemore Manatsa said.

BAT bounced back to an inflation adjusted ZW$256 million (about US$3 million) pretax profit during the review period, from $26 million (about US$310 000) in 2019.

"The company's premium brand, Dunhill, returned to the market in March 2020 as the company was now able to import the brand and as a result, it recorded a significant increase in volume growth of 1,481% versus prior year. In the aspirational premium segment (Dunhill Kingsgate and Dunhill Newbury), volumes declined by 45%. In the value-for-money segment, (Madison and Everest) and low-value-for-money brand (Ascot), volumes declined by 8% and 47% respectively. This reduction in sales volumes was driven by shrinking consumer disposable incomes due to the challenging economic environment and the Covid-19 pandemic's impact on sales," Manatsa said.