BAT’s Half-Year Net Profits Falls By 3.5%, Blames It On Taxes

BAT has announced 1H23 performance, recording a 3.5 percent y/y decline in EPS to KES 28.22, faring better than expected considering a 6.9%y/y decline in net revenues.

The company managed to deliver a 7%y/y reduction in costs from operations and higher finance income which helped support the bottom line. PBT slid 3.5%y/y while the effective tax was at 30%.

Gross revenue fell 4.0%y/y, with a greater fall in net revenue being a result of the partial absorption of the excise tax which was increased twice in the prior year.

Consumers seemed to be under significant pressure, with the volume of illicit trade rising to 25.5% according to research commissioned by the company and conducted for the period to December 2022.

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BAT took a hit on both exports and the Kenya domestic market. Higher illicit trade is now at the highest level in over a decade when we consider the numbers available to us. Weak consumer demand was also apparent.

Export markets (now 70-75% of volumes) have been a key driver of revenue growth in the past, now appearing to be slowing due to geo-political tensions which could reverse in the coming months.

BAT Kenya also points at a 10% increase in excise duty effective July 1st, 2023, contained in this year’s National Budget, from 6% effective October 2022, which hit its sales figures and triggered the emergence of illicit trade in tax-evaded cigarettes.

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Net revenue fell 6.9%, a double whammy from both the domestic market as well as export markets (Somaliland and Sudan) – which have been important growth markets in the past. Geo-political tensions and conflicts caused disruptions leading to operational challenges in accessing parts of these markets. Sudan is the major buyer of cut rags from Kenya.

The high levels of illicit trade jumped further over the year, and is now estimated at 25.5% from 22% in the prior year. This seems to have been partly driven by consumer disposable income pressure, which also saw a downtrading from aspirational products. Legitimate demand was also reduced.

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