BAT Zim stock overpriced: Analysts

Listed cigarette manufacturer, BAT Zimbabwe’s current share price of circa $800, has a 16 percent downside to reach ‘fair levels’, analysts at IH Securities have said.

BAT Zimbabwe’s share price is the highest on the Zimbabwe Stock Exchange ( ZSE), and in recent weeks has range-bound around $800.

To be precise, the cigarette producer’s share price has been moving by +/-8 percent each week, making it less volatile than about three quarters of equities on the local bourse over the past three months.

But analysts at IH Securities believe that there is room for some downside.

“We estimate BAT is trading on a PER (+1) to FY21 of 20,1x versus its peers at 19,65x, and EV/EBITDA (+1) to FY21 of 13,6x compared to peers at 13,6x. Using a blended DCF and multiples-based valuation method we now arrive at a target price of $669,80 for BAT, implying fair value at these levels,” said the analysts.

BAT Zimbabwe is part of the British American Tobacco Group of Companies ( BAT), which is listed on the London Stock Exchange.

BAT’s portfolio comprises combustible tobacco products, such as cigarettes, alongside a range of non-combustible products.

Earlier this month, BAT Zimbabwe reported a 12 percent drop in sales volume for the full year to December 2020, attributed to inflationary pressures that eroded consumer purchasing power.

Notwithstanding the dip in volumes, revenue at $2 billion in inflation adjusted terms increased by 40 percent when compared to the previous year driven by price increases as well as revenue generated from the export of cut-rag tobacco.

The two revenue generating streams resulted in a gross profit of $1,071 billion, an increase of $18 million or a growth of 2 percent when compared to the same period in 2019 where gross profit amounted to $1,053 billion.

Analysts remain cautiously optimistic of an improved performance in the current year as uncertainty brought about the Covid-19 pandemic continues to loom large.

“Barring any further lockdowns from a possible third wave of Covid19 infections we, however, believe volumes will gain momentum especially in the second half of the year to FY21.

“We anticipate that revenues will grow at 106 percent in FY21 to $3,14 billion on the back of higher average price per stick and regularised cut-rag production. Gross profit margins are expected to remain sticky upwards at 74,2 percent whilst EBITDA margins are anticipated to continue on a steady recovery path year- on-year from 24,34 percent to 37,5 percent in FY21 as exchange rate losses moderate on the back of the stabilising currency,” said IH Securities, although predicting a jump in costs as well.

“We are however of the view that growth in marketing and advertising costs as a percentage of sales will continue on an upward trajectory in the immediate short term as the company ramps up efforts to fight sluggish demand.”