Illicit cigarette market taking a heavy toll on BAT’s revenue
BRITISH American Tobacco (BAT), the biggest player in South Africa’s smoking industry, expects to exceed its single figure constant currency adjusted diluted earnings per share growth target for this year.
The UK-based global player revealed this as it battled a high prevalence of the illicit cigarettes market industry which was sapping about R25 billion in total revenue and R5bn to the fiscus every year.
It said in a SENS update yesterday that the global group’s expectations remained unchanged for industry volume to be down around 3.5 percent for the full year.
The group is performing well in the US, with growing value share and pricing in line with expectations.
US industry volume decline remained in line with historic ranges and was expected to be down around 4 to 4.5 percent for the full year.
The group’s Tobacco Heating Products (THP) was seeing geographic expansion with revenue expected to grow substantially.
In Japan, BAT’s global vapour business is expected to deliver double-digit volume and constant currency revenue growth in 2018.
The group said the THP and vapour revenue was showing strong growth and was expected to reach £900 million (R17.05 billion) of reported revenue this yera, led by THP.
Casparus Treurnicht, portfolio manager at Gryphon Asset Management, said that there was a massive regulatory overhang upsetting investors globally.
“Regulatory bodies in the US have been particularly vocal about tobacco products and it is this uncertainty that is keeping a lid on BTI ratings,” he said
He said new regulations and disruptions can be announced anywhere at any point in time and investors had adopted this view in all parts of the globe.
But locally the group, which commanded 80 percent of the market, said that illegal tobacco products today accounted for about 24 percent of the South African market with an estimated 5.5 billion illicit cigarettes sold in the country last year.
That means that more than 15 million illegal cigarettes were smoked every day in South Africa.
“Last year, the South African government was defrauded of an estimated R5bn in unpaid taxes on illegal cigarettes.
“Conservative estimates suggest that more than R25bn has been lost to the fiscus over the past five years due to illegal trade,” the group said.
Over the last five years, the volume of legal cigarettes sold by BAT has decreased from 22 billion to 15 billion and resulted in the loss of 600 jobs.
Treurnicht said that the illicit tobacco trade was something that is out of BAT’s hands and could need more of a regulatory effort to curb.
“I think it will be some time before BAT recover to previous levels…
“Changing packaging and distribution to be even more unique is a capital-intensive exercise, which will put more strain on cash flows and dividends,” he said.