This research report was prepared by the Research Department of Old Mutual Securities Limited. Old Mutual Securities Limited is a securities trading company licensed by the Capital Markets Authority (Kenya) for the purpose of facilitating trade on the Nairobi Securities Exchange.

Key highlights:
  • 2014 financial performance: BATK KN registered 7.2%y/y growth in net revenues to KES 21.0b driven by increased volumes from the Democratic Republic of Congo (DRC), forex gains arising from export sales, as well as improved performance in the domestic market. Overall, net income rose by 14.3%y/y to KES 4.3b driven by conserved expenses (+5.9%y/y to KES 14.7b) as well as reduced finance costs (-8.3%y/y) to KES 276m. Cash generated from operations increased significantly by 31%y/y to KES 6.6b reflecting enhanced working capital management in the year as well as improved profitability. The company deployed Capex worth over KES 1.5b for the upgrade of its factory capacity to meet the growing contract manufacturing volumes from DRC. The traffic has resulted from the recent closure of BAT Congo.
  • Operational risks: Increased tobacco regulation and rapid increase in excise could exert pressure on volume sales. Tax revenue contribution to the government rose by 6.5%y/y in FY14 to KES 15.4b driven by higher Excise Duty and VAT. Nonetheless, falling demand for cut rag from Egypt continues to slow growth in revenues.
  • Low div. yield despite high pay-out ratio: The Company has declared per share dividend of KES 42.50, a 99.9% pay-out ratio. At the current price of KES 878, the stock is trading on a PER of 20.6x (45.5% premium vis-à-vis 11.3x industry average) and a PBVPS of 10.8x (40.2% premium vis-à-vis 6.5x industry average). With a dividend yield of 4.8% and a PEG ratio of 335.4x we still believe the stock is too expensive despite its strong ROE (52.4%).
  • Valuation: Based on Bloomberg PT consensus and relative valuation, we arrive at a fair value of KES 780.00/share, representing 11.2% downside risk potential compared to the current price of KES 878/share hence a price correction is imminent creating an opportunity to pick up the stock again at lower levels.
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