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BAT Zimbabwe boasts an impressive portfolio of brands, and sells its products nationally. For many years the company operated in Zimbabwe with very little or no competition at all. Today the company faces some competition and pricing pressures in an economy which is facing a number of challenges.
Add to this the restructuring which saw the closure of its export business, and the 50 percent increase in excise duty, it was a given that the business was going to suffer a decline in revenues in this last trading period.
This however is temporary and thus going forward the business should see an improvement in revenue growth.
With the restructuring; BAT Zimbabwe has managed to reduce its COGS and operating costs which were really weighing down the business and reducing its profitability.
With the IEE transaction being a once off, the business should see its profitability growing back to significant numbers in the forecast period.
In a nutshell BAT Zimbabwe performed well and the declared dividend is sustainable going forward as the business is cash generative and has a decent cash pile in comparison to its peers.
With a Quality of Earning (how much of reported earnings are backed by cash) of 193 percent, suggesting that the company is a solid cash generator.
No doubt the company has returned value to its shareholders in the last few years and its performance mirrors its UK parent which counts Mark Woodford among its investors.
A combination of marketing and modernisation should keep the company’s brands conspicuous in consumers’ minds, and up to date with the ever changing consumer tastes.
A good case in point is the introduction of the SWITCH.
This should mean that as long as the company’s brand appeal remains intact, the company’s cashflows should be relatively robust irrespective of the current economic conditions.
As an example, this past 12 months the company generated enough cashflows which easily covered its obligations and a dividend.
However; BAT Zimbabwe could leave some investors confounded for one reason or the other.
The stock price is way overvalued given a book value of just US$10,8 million versus a market cap of US$278 million thanks in part to the tight shareholding structure.
With a Price-to-Free Cash Flow (P/FCF) ratio of about 38 the company is trading way above its real value if one were to consider that the company has cash per share of US$0,35, and an asset per share of US$1,48.
While it is true and a fact that stock prices in the long run will always go up; BAT Zimbabwe’s stock price has compounded more than any other stock listed on the Zimbabwe Stock Exchange.
This could be the only company listed on the ZSE that has fundamentals that do not justify its market value.
An analysis of the numbers gives a stunning picture of the huge mismatch.
The reason for this is the illiquid nature of the stock and the tight shareholding structure were 81 percent is closely held by the top 4 shareholders, and the other 19 percent is the other shareholders and the free float.
Only a total volume of 1,2 percent of the shares in issue has been traded since April 2009 to date.
So on average in the last five years only 50,725 shares per year have changed hands out of 20,6 million shares in issue.
It is more an issue of supply and demand.
This basically means it would nearly be impossible for the stock price to significantly go down.
In the short term investors should consider an investment in the business and in the long run there are a number of uncertainties which might negatively affect the stock price, chief among them if one of the top three investors were to sell making the stock more liquid, and the impeding laws banning smoking in buildings (including night clubs, and bars) in Zimbabwe which are likely to see the reduction in demand thereby affecting revenue. – FinX.
Online Reporter