Markets & Finance

Mastermind seen taking huge hit as tax rises

machine

A production line machine at the British American Tobacco factory. PHOTO | FILE

The higher tobacco taxes that came into effect two weeks ago are likely to hurt Mastermind Tobacco Kenya revenues more than BAT which dominates the mid and upmarket category, London-based investment bank Exotix says.

Exotix equities analyst Anthea Alexander says in a new coverage note that BAT’s margins are likely to be protected by its dominance of the premium cigarette segment, which had a lower tax increase compared to the lower-priced segment.

The new tax rate of a flat Sh2,500 per mille (1,000) of all classes of cigarettes represents a two per cent increase on the previous tax charged on premium cigarettes for BAT, a 43-50 per cent increase for mid-priced cigarettes and a 108 per cent rise for low-priced or economy cigarettes.

“We think BAT Kenya’s competitor, Mastermind Tobacco Kenya (MTK) is at a greater disadvantage with this new excise structure, because its sales are predominantly economy and mid-priced products on which the tax burden is higher,” said Ms Alexander in the report.

Nevertheless, BAT has increased the prices of premium class cigarettes by 29 per cent helping the firm absorb some of the higher tax on the mid- and lower-priced brands, whose prices have gone up by a maximum of 32 per cent and 58 per cent respectively, which is lower than the tax increases.

According to Exotix, Mastermind’s long-running excise tax licence row with the Kenya Revenue Authority (KRA) which saw it suspend production for the local market also presents an opportunity for BAT to gain market share in Kenya.

READ: Mastermind's war with KRA stalls production

The tax row forced the company to only produce for the export market, awaiting issuance of the excise tax licence.

About a fifth of Kenya’s adult population or 5.1 million people are smokers, according to studies by International Institute for Legislative Affairs, a public policy think-tank.

The threat of lower revenue due to higher taxes is low however, even with the tobacco firms passing on the cost to customers. Exotix argues that price increases for cigarettes have not matched the growth in purchasing power of the average Kenyan over the years.

It however projects lower volumes in the domestic market next year, with the analysts expecting BAT’s quantities to decline by up to 13 per cent.

“We make a simplified assumption that per capita consumption will decline four per cent for every 10 per cent increase in price (from 2016)….price increases, together with better mix, will more than compensate for lower volumes,” said Ms Alexander.

The report came as BAT was on the spotlight following damaging bribery allegations carried by BBC, including claims that the firm bribed Kenya Revenue Authority officers to hand them tax files belonging to Mastermind.

Further, BAT was reported to have bribed the tax officers to make numerous tax demands on Mastermind in a strategy of intimidation to damage the reputation of the Kenyan firm.

The company has however defended itself saying the claims were made by a disgruntled former employee. Lobbyists in the US have taken up the cause and are demanding official action against BAT, owner of 42 per cent of Reynolds American, the second-largest US tobacco firm and parent firm of R.J. Reynolds.