BAT books R300m impairment on SA plant closure

British American Tobacco (BAT) has booked a £14m (R305m) charge on its only South African plant in Heidelberg, Gauteng, for “accelerated depreciation” of the asset amid plans to mothball it at year-end, barring a miraculous intervention by the government.

The group revealed the impairment in its annual report published on Friday. The London-based BAT in January said the infiltration of illegal cigarettes in South Africa had made local production unviable, opting for an import model to meet local demand.

The JSE-listed producer of popular brands such as Peter Stuyvesant, Pall Mall and Dunhill has lost significant market share to illicit cigarettes, which it said now comprise 75% of the domestic market.

The Heidelberg plant, once the eighth largest in BAT’s global network, also exports to several countries in the wider Southern African region.

It is operating at just 35% of total capacity, making it unsustainable.

The decline in volumes in South Africa contributed to the poor performance of the group’s Asia Pacific, Middle East & Africa (Apmea) business.

“Apmea volumes declined 38.2%, leading to a 41.2% reduction in revenue (being down 39.4% at constant rates), largely driven by lower volume in South Africa and New Zealand and by the group exiting the category in a number of markets, including Malaysia and Saudi Arabia,” the company said in the annual review.

South Africa is facing an onslaught from syndicates, costing the fiscus billions of rand a year in illicit economy activities.

Last year BAT called on South African authorities to place customs officials at cigarette factories as part of measures to clamp down on the proliferation of illegal cigarettes, which it said was costing the fiscus R100m a day in lost revenue, amounting to R28bn a year.

The group also called for the “urgent” introduction of a minimum retail price of R37 per pack, saying it should be illegal to sell a box of 20 cigarettes below the threshold, which it said was “economically viable”.

BAT’s 2023 results were negatively affected by an impairment of goodwill regarding South Africa of £291m due to the continued “negative effect of illicit trade”.

Primary risk

BAT listed illicit trade as the primary risk facing the business as a whole, indicating the problem is not isolated to South Africa.

It said this trade often leads to more restrictions and regulations imposed on the legitimate industry, including sales restrictions.

The group said it also led to erosion of goodwill, with lower volumes and/or increased operational costs.

“The existence of illicit trade reduces our ability to reduce the health impact of our business. It undermines policies of governments with respect to underage tobacco users and creates bases for inappropriate regulation,” it said.

“As illicit e-commerce becomes a larger threat to the business, the group determines the scale of illicit online sales to highlight the threat to authorities and to enable them to take direct action against websites selling illicit products.”