Uganda: Decline in Batu Price Didn't Reflect Market Position

Source from:  The Monitor 03/30/2011

British American Tobacco Uganda (BATU) released its Financial Year 2010 (FY10) results with a 40% growth in Profit after Tax (PAT) and therefore Earnings per share (EPS). The directors recommended a final dividend of Shs 158 per share having paid an interim dividend of Shs 70 per share. This has culminated into a total dividend of Shs 228 compared to FY09's total dividend of Shs 56. Dividends therefore grew by 182%. This good growth is due to growth in earnings and the fact that BATU paid out 100% of the earnings made in FY10. This makes BATU more of a value stock than a growth stock since a high payout ratio usually reflects that the company is not looking at expansion in the short term. Therefore, for an investor looking to gain in the short term (value investors), BATU will be a good alternative. BATU's Dividend Yield (DY) is currently at 28.5% which subject to a deduction of the already paid interim dividend is 19.8%; this means that if one invested into this stock today at the current price of Shs 800, one will earn 19.8% return from the dividends. The high dividend yield was due to the good dividend growth and the contrasting negative decline in the price of BATU from the opening price of Shs1,740 on Tuesday last week when the results were published closing at Shs 800. This decline did not represent the whole market position as it was an across books deal. However this was sustained in the proceeding trading session with more demand at Shs 800 leading to low supply as the price is deemed so low. This, coupled with the limited number shares in the market, leaves liquidity on this counter limited. Good performance for the BATU counter was due to cigarette price increase, growth in leaf exports together with the impact of a favorable exchange rate for exports while my analysis also includes a decline in VAT and Excise duty as also materially contributing to growth in Earnings. Going forward, these factors are expected to keep supporting growth. Leaf exports cover BATU's principal business and Volume shipments were higher by 19% for FY10 and with a favorable climate, this is not expected to negatively change in the medium term. Also, with two wet and dry seasons which ensure growth and harvest throughout the year, sustainable supply of the tobacco leaf is ensured. Supply of tobacco on the international market is reported to be high but with BAT group divided into regional blocks that complement each other, there is a competitive advantage of BATU against competitors in terms of availability of market. The favorable exchange rate is not a sustainable factor going forward and therefore the movement of UGX against the USD should very much be watched as a determinant of future earnings for BATU as an exporting company. The USD gained by 17% against the Shs year on year up to 31Dec 2010. Sustainable stabilization of the Shs against the USD is expected in the medium term through growth in exports and the start of the phased oil production which is expected to start with 60,000 barrels per day (bpd). Uganda's consumption is anticipated to still be below 20% of the 60,000 bpd in the next 5 yrs hence exporting 80% of that oil will bring in substantial foreign exchange. We may therefore see sustained stability of the green back against the Shilling only in the medium term and not short term. A decline in VAT and excise duty by 5.9% y/y also supported the good growth in EPS. However, this is threatened by health organisations which want excise duty to be increased from the current 70%.Therefore, there is need to watch government policy. Finance costs and other expenses grew by 164% and 75% respectively therefore better efficiency will ensure lower costs hence profitability in the medium and long term. Given the favourable climatic condition in Uganda and availability of market from BAT group, leaf export will still be a sustainable source of income while the movement of the USD against the Shilling and change in country policy need to be watched going forward. Enditem