Stricter tobacco regulations are set to slow revenue growth for tobacco firms, souring the outlook for the stock of listed manufacturer BAT #ticker:BAT.
Genghis analyst Gerald Muriuki says in a coverage note on the East African tobacco industry that the stock now retains a downside (minus) of 16.7 per cent on its current trading price of Sh800.
The tough tobacco control regulations came into effect in September after a spirited fight back through the courts by BAT was defeated, bringing with them a two per cent levy on the value of the manufactured or imported tobacco products that goes into the tobacco control fund.
This fund is meant to compensate those negatively affected by the product and to educate the public about the adverse effects of tobacco consumption.
“Increased anti-smoking lobbying, worldwide push against tobacco use points to an industry under increased pressure on the growth frontier…in the medium term, as the laws come into force we expect local sales to slow at a fairly steady three-year compound annual growth rate of -0.6 per cent,” said Mr Muriuki in the report published last week.
“The ban on sale of single sticks will be a drag on affordability, while a ban on public smoking and health campaigns will see a smaller percentage of future population engage in smoking due to lower exposure and growing health awareness.”
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He concludes that while the company might be able to control costs, concerns remain about a general decline in consumption, which saw net sales for the 2016 financial year fall 10.8 per cent from Sh22.3 billion in 2015.
The BAT stock has been among the most resilient at the NSE in recent years, protected by lower liquidity and a dividend policy that sees the firm pay out to shareholders its entire net earnings.
As a result, the firm has been paying dividends above Sh40 a share.
The enactment of a new excise tax regime that now provides for tax on tobacco products to be reviewed every two years based on inflation changes is though a positive for the stock.
It protects the tobacco firms from the previous practice of arbitrary hikes on the sin tax that would expose the industry to punitive charges at a moment’s notice.