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BAT exports seen increasing

However, a high-cost base that is also dollarising is expected to put pressure on margins going forward.

LOCAL research firm, IH Securities (IH) says tobacco export volumes at the Zimbabwe Stock Exchange-listed British American Tobacco (BAT) are likely to improve this year as a result of key markets like China shifting away from long-term lockdowns.

However, a high-cost base that is also dollarising is expected to put pressure on margins going forward.

In its analysis of BAT financial results for financial year 2022 (FY22), IH said disposable incomes for consumers were set to marginally improve in 2023 due to increased mining activity, a forecasted strong agricultural season and reviews of wages for public sector workers.

“We believe that aforesaid bottom of the pyramid will aid a moderate uplift of cigarette volumes for BAT in FY23 relative to FY22. We believe that pricing will, however, come under pressure due to lower pricing from competitors.

“We are of the view that export volumes in the year will likely improve as key markets such as China pivot away from sustained lockdowns. Margins are expected to remain under pressure in the face of an elevated cost base that is also dollarising,” the firm said.

However, for forecasts to remain relevant in the present inflationary environment, the firm shifted to a United States dollar-based valuation of the business with United States dollar (US$) revenue seen registering at US$31,85 million to FY23.

“We believe that in the medium-term excise duties will revert to dollar era rates therefore decreasing the net revenue line.

“In our view, earnings before interest, taxes, depreciation and amortisation (EBITDA) margins will start moderating going forward down to a steady state of 40% while net income is expected to come in at US$10,5 million in the current earnings cycle. However, as margins correct to historical averages, we expect a slower growth of profits relative to the topline.” IH noted.

During the period, consumers’ pockets were negatively impacted by the inflationary environment and a Zimbabwe dollar liquidity crunch resulting in BAT volumes contracting 6,7% from 1,13 billion sticks in FY21 to 1,05 billion in FY22.

The company also noted that its pricing in real terms was markedly higher than competitor trade prices within the period.

Volumes in the cut-rag segment underperformed declining 43% year-on-year due to decreased demand from export markets while revenue contribution remained weighted towards the domestic market with cigarettes contributing 97% of net revenue in the year.

Leaf and cut-rag tobacco exports contributed 3% to net revenue, down from 10% in FY21 on account of depressed export volumes. Selling and marketing costs as a percentage of sales decreased from 12,8% down to 9% in the period under review.

“Administrative expenses grew on the back of inflationary pricing of costs while exchange losses resurfaced as the local currency deteriorated significantly within the period. As a result, margins came under pressure in FY22,” the securities firm said.

EBITDA margin eased from 51,3% to 44,6% while net margins fell from 38,8% to 34,8%.

The group remained cash positive and debt free despite capital expenditure as a percentage of revenue growing from 2,1% to 12,5% due to investment in additional electronic equipment and replacement of aged fleet.


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