Economic expansion to drive BAT growth
ZIMBABWE’S anticipated economic growth this year will likely see bottom- of- the- pyramid liquidity improve, benefitting consumer companies like British American Tobacco (BAT), equity analysts say.
The Government has projected a growth rate of 3,8 percent in 2023, which economic analysts believe is a huge possibility on account of the positive developments in key sectors of the economy.
For BAT, volumes at the listed cigarette maker are seen improving in the current financial year as disposable incomes for consumers are expected to marginally improve.
This will mainly be driven by the increased activity in the mining sector and agriculture production as well as revisions of wages for public sector workers.
Additionally, the reopening of the markets in countries like China following the relaxation of Covid-19 restrictions is also expected to be advantageous for the group.
“We believe that the aforesaid bottom of the pyramid will aid a moderate uplift of cigarette volumes for BAT in financial year 2023 relative to financial year 2022.
“We believe that pricing will however come under pressure due to the lower pricing from competitors. We are of the view that export volumes in the year will likely improve as key markets such as China pivot away from sustained lockdowns,” said brokerage firm IH Securities.
Margins are also expected to remain under pressure in the face of an elevated cost base that is also dollarising.
During the first half of financial year 2022, the business environment was characterised by inflationary pressures in the first half emanating from domestic and global factors followed by a relatively stable second half as monetary authorities pushed back with contractionary measures.
The period under review also saw increasing power blackouts impacting production for some lines.
Consumer incomes were negatively impacted by the inflationary environment and a local currency liquidity crunch resulting in BAT volumes contracting 6,7 percent from 1,13 billion sticks in 2021 to 1,05 billion in 2022.
The company also noted that their pricing in real terms was markedly higher than competitor trade prices within the period. Volumes in the cut-rag segment underperformed expectations declining 43 percent year on year due to decreased demand from export markets.
Revenue contribution remains weighted toward the domestic market with cigarettes contributing 97 percent of net revenue in the year whilst leaf and cut rag tobacco exports contributed 3 percent to net revenue down from 10 percent in 2021 on account of depressed export volumes.
For the current financial year, IH Securities projects revenue to reach US$31,85 million. The research firm has adopted a US dollar valuation of the business for forecasts to remain relevant in the present inflationary environment.
“We believe that in the medium-term excise duties will revert to dollar era rates, therefore, decreasing the net revenue line. In our view, EBITDA margins will start moderating going forward down to a steady state of 40 percent whilst net income is expected to come in at US$10,5 million in the current earnings cycle,” said IH Securities.
However, as margins correct to historical averages, the IH Securities expect a slower growth of profits relative to the topline.