British American Tobacco Kenya (BAT Kenya) announced results for the 12 months ending December 2015, recording 16.9% y/y EPS growth to KES 49.76. The directors announced a final dividend of KES 46.00, bringing the total dividend paid in FY15 to KES 49.50. (Payout ratio of 99.5%). Below please find key highlights:
Gross revenue recorded 7.6% y/y (+11.6% h/h) growth to KES 36.7 BN, courtesy of improved sales mix from domestic and export markets. BAT Kenya’s top line was a beneficiary of the depreciation of the KES against the USD in 2015, which impelled cut rag export growth to Egypt in 1H15. Cut rag recorded 19% growth in volumes to see net revenues up 5%.
Cigarette export volumes growth into the 13 inland export markets further supported the export market growth, following the closing of DRC’s manufacturing operations in 2013 to see the export market account for 63% of factory output. The domestic market’s revenue however grew at a faster rate, (2% volume growth) impelled by the growing higher end Global Drive Brands sales and the launch of 2 premium products during the year, Dunhill Release and Embassy Fresh in
Net Revenue recorded 5.8% y/y growth to KES 22.3 BN, following the new implementation of higher Excise Duty in December 2015: We estimate a 10.4% y/y increase in Excise Duty and VAT payment (+12.5% h/h) in FY15, following the implementation of the new Excise Duty bill in December 2015. The domestic market’s net revenue recorded 6% growth, vis-à-vis the Export market’s 2% net revenue growth to see the domestic market account for 55.6% of BAT Kenya’s top line (55.4% in FY14).
Operating profit margin improved by 418 bps y/y to 34.5% in FY15 (annualized operating profit margin of 42.3% in 2H15): BAT Kenya’s direct and indirect costs held stable (-0.5% y/y) at KES 14.6 BN in FY15 (-14.6% h/h) courtesy of improved operating efficiency stemming from economies of scale in the leaf processing and cigarette manufacturing processes. Additionally, reduced fuel costs were enjoyed courtesy of reduced power costs and the global dip in oil prices.
We note that BAT Kenya’s power costs declined 9% y/y in FY15 following the introduction of cheaper geothermal power into the grid, as well as reduced large commercial and industrial End User Tariffs approved by the Energy Regulatory Commission (ERC) as from July 2015.
Net finance Costs increased 93.5% y/y to 534 MN in FY15 (75.3% h/h) due to a higher interest rate environment in 2H15: BAT Kenya’s net finance costs were up 93.5% due to higher short term lending rates in 2H15 as well as the forex losses, as the FMCG company has a mix of domestic and USD denominated debt. BAT Kenya’s cash generation from operating activities however declined 14.5% y/y to KES 5.7 BN in FY15, as a result of a slight decline in working capital management, which we believe is as a result of a slight inventory build up.
The company’s working capital turnover was recorded at 7.9x in 2H15 (10.4x in 2H14) while the current ratio was recorded at 1.5x in FY15 (1.2x in FY14). Capex for the year however declined 63.2% y/y to KES 559 MN in FY15 following the completion of the previous years’ inland export market’s capacity expansion plans. The decline in cash from operating activities coupled with the significant increase in cash used in financing activities saw the company’s net cash position at period end dip by 119.9% y/y to a shortfall of KES 1.6 BN, equivalent to a negative Free cash flow/ share of KES 8.79. the company however remains a generous dividend payer, with a payout ratio of 99.5% in FY15, translating to a dividend yield of 5.3%.
We expect BAT Kenya’s performance to be driven by organic growth in both the domestic and inland export markets, as well as improved efficiencies both in production and outbound logistics. Clarity regarding excise tax imposition paired with tamper proof tax stamps could see the illicit cigarettes’ market share eroded over time in the domestic market. This paired with BAT Kenya’s upward product price review (in excess of the excise duty increase) due to the inelasticity of cigarette demand creates upside for top line growth and operating margin improvement potential in FY16. Notably, BAT Kenya’s handsome dividend payment makes the counter a good defensive stock. The counter in addition trades at a slight discount to the Sub Saharan Africa listed FMCGs and we therefore maintain our overweight recommendation.
Source: Dyer and Blair Research.