14% yield for BAT Kenya investors in FY24
Excluding the impact of exchange losses, the business would've delivered mid-single digit profit growth on a like for like basis. Demonstrating that our underlying business performance remains solid.
A comment by Philemon, BAT Kenya's finance director during their earnings announcement through a video on their website. After looking at their financial statements and getting an overview of the performance, a few key numbers would validate this statement.
1. Operational expenses
The cost of operation increased by 4.4%; from KES 17.63B to KES 18.4B. With a lot of factors at play and BAT Kenya serving multiple markets in the region, your guess for the increase in opex is just as good as mine. However, regulatory changes in Mauritius could've played a role.
2. Cost of capital
In the high interest rate environment that defined FY24, the business incurred a KES 829M cost of capital, which is a stark contrast from FY23 where they received an income of KES 97M.
Stronger shilling = lower revenues
Losses in foreign exchange really impacted the firm's performance, the reason being that nearly half of the company's revenue comes from exports. To highlight just how servere the effect of a stronger shilling was on BAT Kenya's business; for every dollar of export the company received 20% less shillings in FY24 than it did in FY23.
Earnings from foreign sources are a double-edged sword. For a company—and by extension, its investors—to benefit from foreign income, the local currency has to be weak. This was the case in FY23 when the Kenyan shilling (KES) traded at around 160 to the dollar. However, a weak currency often means higher local costs especially for import-heavy economies like Kenya's. On the other hand, when the local currency strengthens, the economy may be in better shape, but foreign earnings lose value. And the results were there to back this up with BAT Kenya and nearly every other company on the NSE posting record profits from foreign business for FY23.
The adjustments made
The company was proactive and put in place measures to mitigate the challenges they faced. One that stood out for me was price adjustments, Crispin mentioned the fact that they adjusted prices of some of their key brands to generate value. I'd understand why BAT Kenya, a company that serves the mass market, would do that. Any company that's targeting the mass market has to make sure that their prices reflect true value for the customer, in this market segment price can be a dealbreaker.
The other measure that stood out was distributor consolidation; according to Crispin, this move is meant to streamline efficiency in operations. They reduced the number of strategic partners from 5 to 2, which certainly increases efficiency by reducing the number of parties involved. However, efficiency through consolidation comes at a price, which is a resilience. A system with just a few players is always much more efficient than one with more players, but the compromise for efficiency concentrates risk and makes the entire system more vulneruble to disruption. I certainly hope that Crispin and his team considered this when making the decision.
Shifting focus; the company has introduced prudent working capital management initiatives that have improved cash generation by an astounding 23%. As an investor I'm happy to hear that, Philemon and the entire finance team did a phenomenal job to pull this off. This might be a dividend from the consolidation, not taking any credit from the finance team though.
Crispin's closing remarks
The MD, Crispin Achola, closed by talking about the company's 3 focus areas: Combating illicit trade, helping to shape regulation for new category products and unleashing talents' potential. I believe that the second area of focus has the potential to pay a lot dividends coupled with no.3—empowering the team and helping them realize their full potential. The first area shouldn't be overlooked either, fighting illicit trade has the potential to boost revenues in both the short and long terms.
Bottom line
Investors are definitely delighted with the 14% yield, considering the 19% dip in profits, and will be eagerly awaiting the dividend payout. The overall performance of BAT Kenya was good, revenues were up 1% but earnings per share were down 19.5% and stood at KES 44.83. Mr. Achola and his team delivered to the shareholders and I'm personally looking forward to seeing how the improvements in efficiency through the consolidation of partners will impact the bottom line. The stock currently trades at KES 365 and can earn you 12.33% in dividends at the current price.
I liked the 5 min video on earnings that's on their website, it's a great idea and makes investing more accessible for younger investors who aren't that fond of reading through reports and financial statements. However, I still look back at pre-2020 physical AGMs with nostalgia, we should Make Investing Great Again(MIGA) with physical AGMs. #MIGA.
Recommended reads
A Missed Opportunity: How Regulatory Hurdles Are Stifling BAT Kenya’s Growth
Resources
NOTE : These are personal opinions and aren't shared by the firm, our shareholders and/or associates