British American Tobacco (BAT) says the fallout from SA’s near five-month tobacco ban wasn’t enough to devalue its business, as sales rebounded strongly after restrictions were lifted in August.
The maker of Dunhill and Lucky Strike has opted not to write down the goodwill of its SA unit, which refers to assets including brand value and customer base, although it did take a hit to volumes and sales in its year to end-December.
BAT had said previously it was losing out on £25m (R512m) a month in foregone profits as a result of the ban, which it had argued was “ill-considered and unlawful”, and which would fuel SA’s illicit tobacco market — which it says is the world’s largest.
Covid-19-related restrictions did weigh on the group in its year to end-December, but it said on Wednesday that overall demand was resilient during the pandemic, and volumes had rebounded strongly in the second half of 2020. BAT also saw a strong performance in the US, and beat its revenue guidance of 1%-3% growth in its year to end-December.
Adjusted revenue grew 3.3% to £25.77bn and profit from operations rose 4.8% to £11.36bn, with the group saying it saw a 28.5% rise in the number of consumers using its “noncombustible” products — which include e-cigarettes.
BAT saw a slight increase in cigarette volumes in its biggest market the US, as well as better pricing, where adjusted profit from operations jumped 15.5%.
Emerging market disruption
In the Americas and Sub-Saharan Africa, which includes SA, adjusted profit from operations fell 2.5% in constant-currency terms, with BAT saying an increase in revenue was offset by the effects of SA’s tobacco ban, as well as additional supply chain costs. The region generated about 15% of the group’s profit from operations.
BAT finance director Tadeu Marroco said in a results presentation that while illicit trade in SA remained an issue, the group “rapidly returned to market leadership”.
“We saw a significant recovery in our emerging market volumes in the second half, and this has continued into 2021,” Marroco said.
BAT did write down SA e-cigarettes seller Twisp by £11m as it migrates to its Vuse brand. The group had previously flagged that writedown, saying that amid Covid-19, it had to postpone all activities linked to the development and sales of Twisp.
“Since the lifting of the sales suspension, our vapour operations have started to recover, and we remain confident of the category potential in SA,” BAT said on Wednesday.
The group wrote down its business in Malaysia by £197m due to a difficult operating environment, partially due to the ongoing issue of illicit sales.
Outlook
SA was quite small in BAT’s life as a global tobacco leader, said Sanlam Private Wealth senior investment analyst David Lerche.
“The book value of the SA traditional cigarette business should not be permanently impacted now that cigarettes are on sale again,” he said.
Lerche added that BAT had demonstrated an ability to achieve growth from its vaping business, but a concern was heated tobacco, where competitor Phillip Morris was “making great strides.”
Heated tobacco products differ from e-cigarettes as they use tobacco, rather than liquids.
Chantal Marx, investment research head at FNB Wealth and Investments, said it was a very decent result, in line or ahead of market consensus on all major metrics. The earnings guidance from BAT was quite conservative and below market expectations, she said, which could reflect in the reaction to the results of the group’s share.
BAT had given guidance of 3%-5% revenue growth for its 2021 year, also flagging a 7% foreign-exchange headwind.
Marx said while she had no specific insight into BAT’s decision on an SA impairment, they would have assessed the outlook for the local market and concluded that the value was fair based on expected future cash flows. “This could imply that they expect to gain back market share over time,” she said.
In afternoon trade on Wednesday, BAT’s share was down 3.37% to R540.54, on track for its worst day in about two weeks, and having fallen about 16% over the past 12 months.
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