A tale of two shares: How EAC black market is reshaping BAT’s fortune

Saturday March 10 2012

Photo/File BAT factory in Nairobi. While BATU’s profits are coming under threat from the smuggled cigarettes, Kenya’s BAT posted strong full year results a fortnight ago.

An impromptu customs check in northern Uganda tells it all. Smugglers bring in cheap cigarettes using motorbikes, pedestrians and fuel tankers catching tax customs officers off guard, a signal Uganda’s British American Tobacco (BATU) is in for a tougher year.

Analysts are warning that as it prepares to release its full year results in the coming weeks, the firm could see its earnings dented due to an increase in volumes of smuggled cigarettes in Uganda.  

But while BATU’s profits are coming under threat from the smuggled cigarettes, Kenya’s BAT posted strong full year results a fortnight ago.

The contrasting fortunes of the two cigarette companies — both majority owned by British American Tobacco listed at the London Stock Exchange — highlights how a bet to manufacture in a certain location can go boom or bust for companies in the region, analysts say.

BAT Uganda, unlike its Kenyan counterpart, does not manufacture any cigarettes and instead imports them for resell in the Ugandan market.

It stopped manufacturing in 2005 after the parent company took a strategic shift to have the two centres focus on different market niches.


Kenya was upgraded into a manufacturing hub — with an investment by the majority shareholder BAT of $4.14 million while Uganda focused on leaf processing.

The logic was that imported cigarettes from Kenya into Uganda would not attract customs tax because of the East African Community treaties.

But an increase in volumes of smuggled cigarettes in Uganda has eaten into BAT Uganda’s sales since July 2011.

“Of course centralisation of production is the way to go. There are some companies which have relocated to other countries but some have maintained their manufacturing operations in the region,” said Betty Maina, the executive director of Kenya Association of Manufacturers.

The Kenyan unit has been relying largely on exports to among other countries Uganda, with the export business raking in $144 million of the $241 million in revenues made by the company in 2011.

But now, the Ugandan market is facing fresh threats. The latest data by Uganda Revenue Authority and BATU indicates that cigarette smuggling has increased, after a marked drop since 2009 when the tax authority moved to seal loopholes by marking legally sold cigarettes.

Dollar boost

Figures from URA released last week show the tax authority confiscated more than 5.54 million sticks worth Ush130 million ($55,481) in tax revenue between July and December 2011 as smugglers renewed appetite for the activity.

“The surge in smuggling has resulted in a big share of smuggled cigarettes of about 300 million sticks a year on the local market.

"These are cigarettes meant to be sold in South Sudan and the DRC,” read a document obtained from the tobacco company by The EastAfrican, adding that it lost about 240 million sticks in sales volume going by current market share.

URA said it is stepping up its efforts to curb illegal cross-border trade in cigarettes.

“The smuggling activities are mainly carried out by drivers who collude with smugglers without the knowledge of transporters and fuel companies. The Uganda-Congo border is most affected,” said James Kisaale, Assistant Commissioner in charge of Enforcement at URA.

Increased cigarette smuggling has affected BATU’s local sales, leading to fresh fears of slowed growth in profits after the company had returned in the black following three years of losses between 2006 and 2008.

BATU, which is listed at the Ugandan Securities Exchange, is set to announce its full year results later this month. 

BAT Kenya, the cigarette manufacturer listed at the Nairobi Securities Exchange, said its after tax profits rose 75 per cent to Ksh3 billion ($37 million) for the full year ending December 2011 compared with Ksh1.76 billion ($21.3 million) for the same period last year. 

Shareholders were rewarded with a dividend payment of Ksh30.50 ($0.36), up 11 per cent compared with the same period last year. This was also the highest dividend pay - out per share by the cash rich company. 

Dollar boost

Analysts at Kestrel Capital said profits were boosted by the growth in contract manufacturing, which accounts for 56 per cent of the volumes, from new business coming in from Egypt.

The analysts estimate the volume of business to have grown by 70 per cent in 2011 compared with the same period the previous year.

BAT Kenya also benefitted from earning in dollars from its exports, which coupled with the weak Kenyan shilling translated into higher revenues.

BAT Kenya’s shares were the largest gainers in trading at the NSE in the month of February, up 25 per cent to trade at Ksh325 ($3.9).

While BATU’s share price at the USE rallied towards the end of last year to more than Ush1,600 ($0.68), it has remained stagnant at Ush1,930 ($0.82) since the beginning of this month as investors await the release of 2011 financial results.

(ALSO READ: EA investors worried of 2012 prospects as more stocks dip)

The latest rise in cigarette smuggling might further dampen demand for BATU shares.

BATU has been on a recovery path, recording profit that was partly helped by a drop in illicit tobacco in 2009.

Though leaf exports currently contribute about 50 per cent of BATU’s revenues, local cigarette sales are a buffer source of income against fluctuations in export orders.

By Bernard Busuulwa, Emmanuel Were and Peterson Thiong’o