Where there's smoking, there's earnings on fire
Legislation fails to stem investor profit
July 27, 2010
By Florence de Vries
DESPITE anti-tobacco legislation, cigarette makers such as British American Tobacco (BAT) are still experiencing a surge in demand from emerging markets, where newfound wealth is fuelling consumption.
BAT and its rivals are able to sustain and grow profits irrespective of global conditions, according to Allan Gray equity analyst Simon Raubenheimer.
“Worldwide, almost 6 trillion cigarettes are consumed
every year and contrary to popular belief, global cigarette consumption is growing,” he said.
“The long-term economics of the tobacco industry are attractive for shareholders of the major producers, and, on balance, industry fundamentals have become more favourable over the past decade.”
BAT accounts for 10.8 percent of the Allan Gray Equity
Fund, valued at R21.9 billion. BAT shares have rallied 7.4 percent in the year to date, while the JSE all share index has gained 2.9 percent.
Even from a relative valuation standpoint, analysts see
BAT shares as attractive. Jan Mouton, an equity analyst from PSG Tanzanite, said BAT was included in the PSG Flexible Fund.
As of June 30, it was its fifth-largest holding, representing 4.6 percent of the fund.
“In our opinion, BAT is an attractive investment, offering a tax-free dividend yield of 4.4 percent in (pounds) for South African shareholders.”
He added: “We expect that this dividend yield will grow
over time.”
Mouton believes an investment in BAT also gives exposure to fast-growing emerging markets, where tobacco volumes are rising. Emerging markets, like South Africa, Russia and Poland, account for over
two-thirds of BAT’s volumes and over half of its profits.
Raubenheimer noted: “BAT’s revenue growth continues to exceed its volume growth, which is a function of
strong pricing power and favourable mix changes.”
According to Francois van der Merwe, the chief executive of the Tobacco Institute of Southern Africa, BAT has a share of 65 percent to 70 percent of the South African cigarette market.
While legislation in countries like South Africa has caused smoking to decline, the most recent results from global tobacco heavyweights prove that strong brands, pricing power and geographic diversity in the tobacco industry mitigate some of the inherent legislative risks.
In South Africa, tobacco companies are affected by the
Tobacco Products Control Act, which bans advertising,
sponsorship and marketing, as well as smoking in public and workplaces except under specific conditions.
According to the World Health Organisation, Philip
Morris International is the world’s largest tobacco company, with its Marlboro brand the world leader.
However, excluding the US, BAT sells the most cigarettes worldwide and has the largest network in the most countries. – With additional reporting by Ellis Mnyandu
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