via BAT profits slump on indigenisation costs – DailyNews Live by Kudzai Chawafambira  15 SEPTEMBER 2013

Cigarette-maker BAT Zimbabwe incurred a $1,4 million loss after tax in the half-year to June 2013, weighed down by a $10,6 million indigenisation expense.

The loss comes on the back of a $5 million profit after tax recorded in prior comparative period.

Kennedy Mandevhani, the group’s chairperson, pointed out that on a non-adjusted basis, operating profit for the period reduced to $2,4 million as a result of the company’s efforts to comply with

indigenisation policy — compelling foreign-owned companies to cede 51 percent shareholding to locals.

Last year, BAT committed a 26 percent stake to Zimbabwean locals in compliance with indigenisation laws. The company gave a 10 percent shareholding to a newly-established employee share ownership scheme and another 10,74 percent to a Tobacco Empowerment Trust for the benefit of development and support of indigenous tobacco growers.

This translated to four million shares worth a combined $20 million. The remaining 5,26 percent stake will be retained by existing indigenous shareholders.

“This expense represents the fair value of share awards made to employees by our Employee Share Ownership Trust as part of the company’s compliance with Indigenisation and economic empowerment legislation (10,2 million) plus the associated payment of dividends to employees participating in the Trust of $400 000,” said Mandevhani.

However, Mandevhani pointed out that the impact of the loss was “partly offset by other income of $3,3 million due to the forgiveness by a related party of payables for services which had been accumulated during the country’s period of hyperinflation.”

In the period under review, local cigarette volumes dropped by 16 percent due to increases in excise duty coupled with low consumer disposable income and a tight liquidity market.

This comes as the listed cigarette maker pointed out that the cigarette manufacturing industry’s volumes were significantly reduced as a result of a slowdown in Gross Domestic Product (GDP) growth and on-going challenges that consumers in the country continue to face.

“Successive increases in excise duty which impacted cigarette retail prices in 2011 and 2012 have been compounded by coinage constraints resulting in consumers often paying higher prices than those recommended by manufacturers simply due to the unavailability of coins,” said Mandevhani.

He pointed out that despite the decrease in sales volumes across all brands, the Madison brand proved more resilient while its global drive brand, Dunhill grew volume by 44 percent compared to last year, albeit off a small but growing consumer base.

Notwithstanding the volumes challenges, BAT’s local market share according to independent research, stands at over 75 percent.

BAT’s total revenues remained flat at $23,1 million compared to last year due to manufacturer increases net of excise on key brands in December last year which offset on part the impact of lower sales volumes.

Cost of sales came down to $7,1 million from $9,6 million recorded in prior comparable period.

Gross profit increased by $2,5 million to $16 million in the period from $13,4 million registered in prior comparable period, largely driven by strong management focus on cost reductions while operating profit declined to $2,4 million from $7 million recorded in same period last year.

Going forward, Mandevhani said that trading conditions are expected to remain challenging in the second half of the year as the country continues to look for economic stability.

Due to the loss for the period, the group resolved not to declare an interim dividend.