Half Year results for BAT Kenya came in weak (EPS KES 19.48, -9.3% y/y) despite sustained efficiency gains (operating margin had an extra 160bps h/h to 32.9%) as sales continue to drag failing to catch up with the 24.0% increase in excise taxes last year.
We see the tobacco industry sustaining low growth rates (global volume 5-Yr CAGR -4.3%) mainly from continued enforcement of strict anti-tobacco regulations, lobby groups and increased public awareness on smoking-related health problems.
Among the strict regulations brought about from the implementation of Tobacco Control Regulations 2014 are; gory pictorials on cigarette packages and controlled marketing of products. Noteworthy markets across Africa are increasingly adopting the World Health Organization (WHO) Framework Convention on Tobacco Control (FCTC) alongside country-specific legislation implementing similar measures to Kenya’s and developed economies. This will see a smaller tobacco industry and affecting BAT’s 48% export sales.
For the counter, we highlight notable efficiency gains, its high dividend pay-out and expectations of tobacco prices/value offsetting decline in volumes (global retail value grew by about 27% in a similar period volumes declined 4.3%). BATK currently trades at market (peer average) P/E of 19.5X and has an ideal dividend yield of 5.5%.