Local industry will continue to battle low sales volumes in the short to medium term as the COVID 19 pandemic weighs on consumer disposable incomes.
For listed cigarette maker- British American Tobacco (BAT), sales volumes are anticipated to remain under pressure during the financial year 2020 due to erosion of incomes as a result of high inflation now pegged at 785 percent as of May. In the past financial year, sales volume went down 17 percent compared to the prior year.
With COVID 19 pandemic, that was declared a global pandemic, figures from the current financial year are expected to show significant declines due to reduced trading times as the country observed lockdown regulations. Zimbabwe implemented a national lockdown effective March 30 while some businesses had already started scaling down operations with employees working from home to minimise the spread of the pandemic.
“The unprecedented COVID-19 pandemic has added a layer of uncertainty with expectations being a further decline in volumes across segments due to reduced trading in April 2020 and reduced operations in May 2020,” said brokerage firm IH Securities in an earnings update.
“…we expect volumes to come down further as traditional relative inelasticity of the product comes under pressure with consumers choosing to forego the product due to disposable incomes continuing to be stricken by inflation,” said IH Securities.
During FY19, the cigarette manufacturer recorded revenue growth although overall volumes eased 17 percent from the previous period as the company experienced volume declines across segments except for the Aspirational Premium segment whose growth was driven by consumers shifting from Dunhill to Newbury. The Dunhill brand was impacted by duties required to be paid in US dollars.
Resultantly, Newbury brand grew 12 percent while the Dunhill brand suffered a 94 percent decline in volume.
The value for money segment was down 17 percent driven by shrinking consumer disposable incomes, while the low value for money brands recorded an 18 percent volumes dip.
However, revenue for FY20 is anticipated to jump 196 percent driven by price increases as inflation persists.
IH Securities sees gross profit margins remain constant at 73,2 percent as production costs and prices of sticks sold are anticipated to equally rise due to the higher excise duty and generally increasing inflationary pressure.
“We anticipate EBITDA margin to increase from 21,5 percent to 27,8 percent in FY20 on the back of price increases.
“Total assets are expected to increase significantly from $183,63 million to $336,76 million sustained by the 369 percent growth in cash and cash equivalents from $42,38 million to $198,93 million.
“The cash holdings increase is due to the increase in value of trade payables owing to the introduction of the exchange rate between the RTGS dollar and the USD and challenges of repatriating funds owed by the company to its trade creditors and shareholders,” said IH Securities.
Like any other businesses operating in Zimbabwe, performance will also be hinged on foreign currency availability as well as how the severity of the COVID 19 pandemic.