BAT Zimbabwe volumes to benefit from bottom-of-the-pyramid liquidity

British American Tobacco Zimbabwe (BAT) cigarette volumes are set to improve in 2023 but pricing will remain under pressure from lower pricing by competitors, a research company has said.

In a research report, IH Securities said disposable incomes for consumers are set to marginally improve this year off increased mining activity, a forecasted strong agricultural season and revisions of wages for public sector workers.

“We believe that the 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 the lower pricing from competitors,” it said.

IH said BAT export volumes in the year will likely improve as key markets such as China pivot away from sustained lockdowns.

However, margins are expected to remain under pressure in the face of an elevated cost base that is also dollarizing.

“For forecasts to remain relevant in the present inflationary environment, we have shifted to a US$ based valuation of the business.

“We forecast that US$ revenue will register 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,” IH said.

The research company said EBITDA margins will start moderating going forward down to a steady state of 40 percent whilst 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,” read part of the research report.

During FY2022, the operating environment was characterized by inflationary pressures in the first half emanating from domestic and global factors followed by a relatively stable second half as monetary authorities pushed back with contractionary measures.

The period under review also saw increasing power blackouts impacting production for some lines.

As a result, consumer pockets were negatively impacted by the inflationary environment and a ZWL liquidity crunch resulting in BAT volumes contracting 6,7 percent from 1,13 billion sticks in FY21 to 1,05 billion in FY22.

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

Volumes in the cut-rag segment underperformed expectations declining 43 percent year on year due to decreased demand from export markets.

Revenue contribution remains weighted toward the domestic market with cigarettes contributing 97 percent of net revenue in the year whilst leaf and cut rag tobacco exports contributed 3 percent to net revenue down from 10 percent in FY21 on account of depressed export volumes.

Selling and marketing costs as a percentage of sales decreased from 12,8 percent down to 9 percent in the period under review.-ebusinessweekly