Firm fails to pay final dividend for first time in years
Failure to access forex a major concern
You only have to listen to British American Tobacco managing director Clara Mlambo to understand the impact that the “challenging” economic environment is having on business operations in the country.
The period under review was difficult for the cigarette manufacturer as it had to face a triple whammy of challenges including change in the exchange rate, increase in excise duty, and foreign currency shortages.
At the company’s analysts’ briefing held this week, Mlambo highlighted some of the challenges the company is faced with, one of which has forced the company not to pay a final dividend for the first time in a very long time.
Over the years BAT has religiously paid a final dividend to its shareholders but for the financial year to December 2018, having paid an interim dividend of US30 cents, decided that it is in the best interest of the company that profits are reinvested in the operations of the company instead of paying a final dividend as usual.
Financial director Leslie Malunga said the decision not to pay a final dividend is driven by the need to buy tobacco leaf at the interbank rate which is now three times more than what the company used to pay prior year comparative.
“The window to buy leaf is only open once per season, and we needed to buy for the whole year, so we needed to really finance that, so that’s the major reason why we actually did not declare a dividend.”
This the company said will result in costs and prices going up. Leaf accounts for at least 47 percent of cost of sales for the company.
Malunga told Business Weekly that the company used to require roughly $3 million to buy leaf, but would now need probably three times more depending on the prevailing exchange rate.
The increase in excise duty, which was announced in the 2019 National Budget Statement, was also another challenge as it forced the company to make an upward adjustment on prices for cigarettes. The 2019 National Budget, saw the excise duty on cigarettes increase from US$20 to US$25 per 1 000 sticks.
Mlambo said the hike in excise duty was one of the challenges that had a direct impact on the business.
“As this is a consumptive tax, it means that we also have to increase our prices accordingly and pass that onto the consumer,” said Mlambo.
She said her company supports a sustainable excise regime model which, she said, has potential to deliver value and maximise total tax collections.
“We are therefore of the view that a uniform specific tax is easy to implement and administer because only the volume and not the value per unit per product need to be ascertained.
She said specific taxation does not discriminate among cigarette manufacturers and makes it easier for Government to implement.
“It is for that reason that we are of the strong view that the current cigarette excise duty of a specific rate be maintained for both local manufacturers and imported cigarettes so to ensure that the consumption duty paying cigarettes is not disrupted.”
Mlambo also viewed the inability to access foreign currency as a cause for concern going forward.
She said the company, which needs at least $5 million per year to meet its import requirements, will this coming financial year focus on foreign currency sourcing.
She said this would be done through constant dialogue with banks to ensure that foreign payment requirements are met. In the period under review, the company’s cash-and-cash equivalent increased to $33,5 million from $21,4 million due to challenges in paying foreign suppliers and remittance of foreign dividends.
“As previously discussed, if you take out tobacco, 90 percent of our other raw materials inputs are imported, purely because we cannot find them in Zimbabwe so we actually have to import them.”
She said since the inception of the interbank market, BAT had had little success in obtaining foreign currency.
“This is definitely an area of concern in terms of our inability to access foreign currency on the interbank market, despite the fact that we do put in our bids.”
She said this will definitely have an impact in terms of the sustainability of the business.
On performance, BAT’s total volume sales for the full year to December 31, 2018 rose 16 percent across the whole portfolio spurred by growth in product sales and manufacturing efficiencies.
Value for money segment brand, Everest sales grew 15 percent while Ascot grew by 171 percent, a development which management says was as a result of continuing investments into the brands and a growing customer base.
“Everest grew by 35 percent we are starting to realise the rewards of investing into these brands from previous periods and other periods, Ascot also grew by 171 percent, these though (cigarettes) small is a growing consumer base,”
Sells and marketing costs also increased 3 percent from US$4 856 to US$4 990 driven by continued support in active brands.
Likewise, revenue for the year under review jumped 16 percent to US$42 704 from US$36 760, while profit after tax surged 40 percent to $14 808 from $10 570 recorded in the prior comparable period.
The cigarette manufacturer`s inventory grew by US$1 million driven by increase in higher finished goods valuation though excise.
“Administrative expenses declined by 5 percent as a result of savings initiatives and benefits of restructuring activities from previous years which offset inflation in the last quarter of the year.”