BAT takes a big blow: Should investors panic?

CREDIT| BAT Kenya

BAT Kenya Plc (BAT) suffered a major legal defeat in Kenya’s top court last week. How does that affect BAT stock as an investment? Should existing BAT shareholders sell off their shares in the company and prospecting investors keep off, or now is the time to go big on BAT stock? When it comes to stock investing, information is no doubt the key to success. This article seeks to deliver the information you may need to make sound investment decision regarding BAT, particularly in the wake of the adverse court ruling.

How the market reacted to BAT’s legal defeat
BAT’s legal defeat in the Supreme Court did little to discourage demand for its shares. The stock fell 2.0% on November 26, the day the top court issued its ruling. But that was a brief setback for BAT investors as the stock swiftly bounced back. BAT stock gained more than 1.0% on November 27. It followed that with a gain of more than 1.2% on November 28.  The stock closed last week at Ksh491.

What is BAT and what does it do?
BAT Kenya is the Kenyan arm of the British American Tobacco, a global manufacturer and marketer of a broad range of tobacco products. BAT began operations in Kenya in 1907. It has been listed on the Nairobi Securities Exchange (NSE) since 1969. In May this year, BAT marked 50 years of its stock listing on the NSE. The company is in the business of tobacco farming, processing and sale of cigarettes and other tobacco products in Kenya and more than a dozen other countries.

How the Supreme Court ruling could affect BAT Kenya
On November 26, the Supreme Court in Nairobi ruled that a set of tobacco regulations that BAT and other cigarette makers have for years fought to block are proper. BAT and its allies wanted the court to declare the regulations unconstitutional.

The regulations will generally increase costs and compliance burden for cigarette makers like BAT. For example, the company will be required to contribute a portion of its revenue to go toward compensating people affected by smoking and funding research into tobacco control, cessation and rehabilitation programmes.

BAT’s strategic importance to Kenya’s economy
Efforts to tackle smoking addiction and reduce smoking diseases has resulted in tobacco companies facing pressure from almost all directions. BAT’s recent defeat at the Supreme Court goes on to demonstrate the challenges facing tobacco businesses in Kenya. However, it is hard to believe the regulatory headwinds will drive BAT out of business any time soon.

BAT is a major contributor to the Kenyan economy. It has provided jobs for tens of thousands of Kenyans from farmers to factory workers. For example, BAT has directly and indirectly created employment opportunities for more than 80,000 Kenyans.

Moreover, BAT pays billions of shillings in taxes to the government every year. In the last five years alone, BAT contributed more than sKsh80 billion in national taxes to the Kenyan government. That works out to an average of Ksh16 billion in tax revenue for the national government annually from BAT in the last five years.

One would reason that with the high unemployment rate in the country and government’s struggle with tax revenue shortages, the authorities would think twice before trying to put BAT out of business.

BAT looks to international markets to drive growth
BAT may not stop the tightening regulatory environment in Kenya that threatens to crimp its domestic sales and overall growth. But the company is steadily expanding its international market, which should cushion it from domestic shocks.

This year, for instance, BAT expects to make more export sales than it did last year. BAT’s efforts to diversify its market to safeguard the future of its business amid growing regulatory pressures have started paying off. The company’s export sales are steadily rising as a percentage of total revenue. In 2018, BAT’s export sales contributed 48% of total revenue, jumping from 44% in 2015.

BAT currently sells its products in 17 countries across Africa. It hopes to expand its international business with time. Entering more international markets should help BAT not only generate more revenue but also reduce its exposure to the increasingly challenging Kenyan market.

Growth opportunity
Kenya’s efforts to curb smoking no doubt threaten to reduce the market for tobacco companies. But that doesn’t mean BAT has been cornered with no more room to grow its sales domestically. There is a thriving tobacco black market that if closed would widen the market opportunity for BAT at home.

The black market captured 14% of Kenya’s tobacco market by sales in 2018. That was up from 12% in 2017. The tobacco black market not only provide unfair competition for BAT, but also denies the government billions of shillings in tax revenue every year. BAT estimates that the Kenyan government loses Ksh2.5 billion in tax revenue annually to the tobacco black market. The company has urged regulators to step up the crackdown on the tobacco black market, which should help it drive out unfair competition.