Every cigarette packet these days carries a dire health warning – but British American Tobacco (JSE:BTI) CEO Paul Adams has no doubts about the health of his company.
In the annual report on one of the JSE’s biggest market caps (R507.5bn) Adams writes: “I look forward to many successful years for our business.”
Never mind the slings and arrows of the anti-tobacco lobby and the worst recession since the 1930s, BAT managed to raise revenues 10% to ₤14bn and earnings by 19% on a 1% volume rise because of “favourable pricing and resilient brands”. It raised profit from operations by 20% to ₤4.4bn. Earnings in the decade have grown at a compound rate of 11% pa.
BAT has given shareholders an all-in return (dividends and share price gains) of 15.5% pa in the past three years, compared to the FTSE’s average of 1.3% pa.
What’s really remarkable is that BAT flourishes in spite of anti-smoking campaigns in virtually every jurisdiction in which it operates.
Adams reports that global cheap cigarette consumption is more or less stagnant at 6trn cigarettes a year but as the adult population grows, particularly in developing countries, more and more new consumers are hooked.
Cigarettes are taxed literally to death. Taxes and excises of ₤26.5bn dwarf BAT’s own revenues of ₤14.2bn. That means 65% of the cost of BAT’s cigarettes across the world represents tax. That must be quite a disincentive to governments to shut down a killer industry.
Adams complains that the heavy tax burden as well as curbs on advertising and display encourage the illicit tobacco industry. Organised crime has an estimated 12% of the global market – 660bn cigarettes – and is ducking taxes to the tune of ₤30bn. From that figure one can deduce that taxes of the world industry are some ₤240bn.
For a first-time reader, the BAT report is a wondrous document. It celebrates a business that is fantastically successful in spite of huge opposition. But it does not gloss over that it is based on a highly poisonous, addictive substance.
Indeed one of the pictures shows a pack with the warning: “Smoking kills”. The CEO says the company engages and communicates with regulators everywhere.
But the report addresses all the normal concerns – the carbon footprint of BAT, the people, who love the company and enjoy working there, etc.
It fearlessly addresses the risks it faces. Regulation and litigation are ranked lower, as risks, than the illicit trade, excise and taxes, financial and marketplace risks.
After such a good year the directors total remuneration came to ₤8.5m, of which ₤3.3m accrued to the CEO.
At ₤22.74, BAT is 14.9 times latest earnings of 153p and gives a dividend yield of 4.3% on the dividend of 99.5p. With the pound worth just over R11, the local share price is R250.60.
Some say Reinet Investments is a cheap way into BAT. Some 80% of Reinet’s NAV of €1.20 (R12.02) is represented by its stake in BAT. At 1177c Reinet is priced virtually at book value.
Because the bulk of Reinet’s earnings were nothing more than the price appreciation of BAT, a PE is not a very useful measure of value. But earnings of €2.08 in six months makes R20.71 to a South African. “Earnings” thus defined are virtually four times the market price!
Over and above the BAT stake worth R9.61 per Reinet, you get exposure to ₤393m of cash, the comeback potential of the Lehman investment empire and whatever exciting business prospect Johann Rupert discovers. Unfortunately it is in the nature of an investment holding company to trade at a discount over time to asset value.
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