Cigarette manufacturer British American Tobacco shares are the units to buy now, a financial advisory firm has advised.
According to AIB capital analysis, BAT share is likely to shoot in price from the current KShs. 506.0 to KShs. 643.36 in the next one year representing a 27 per cent increase.
“We issue a Buy Recommendation on BAT with a 12 months target price of 643.36,” stated AIB Capital in its valuation for BAT KENYA PLC on Friday June 28.
“This is mainly informed by the possibilities of increased competition from the possible entry of Philip Morris international into the Kenyan Market, reduced disposable income amongst Kenyans as well as increased turmoil among their Key export markets,” it added.
US firm Philip Morris International, the world’s largest tobacco company by sales, is in negotiations to buy a majority stake in Mastermind Tobacco Kenya.
Mastermind Tobacco is owned by tycoon Wilfred Murungi who died on June 7 after being ill.
The deal will see Mastermind upgrade its factory to start producing Philip Morris’ products such as Marlboro – the world’s leading cigarette brand.
Mastermind’s brands include Supermatch, Rocket and Supermatch Menthol, which could be expanded to include Philip Morris’ Marlboro, Parliament, Bond Street and Chesterfield.
The entry of Marlboro into the market will therefore rival their premium BAT’s global brands including PallMall, Dunhill, Benson & Hedges as well as Rothmans.
Philip Morris is expected to acquire 51 percent shares of Mastermind, giving it a firm footing in the region’s multi-billion-shilling cigarettes business.
Marlboro is known for its strategic marketing communications. Initially, they were an all women brand. They then decided to venture into the male market carving out the Marlboro man who is well known for his well chiseled looks. This led to an increase in its market share from less than 1% to the 4th best-selling brand
The deal if successful is expected to eventually shake up the 70 per cent market share held by BAT.
British American Tobacco (BAT) is Kenya’s biggest cigarette maker while Cut Tobacco is third.
Philip Morris operates in seven African countries – Algeria, Egypt, La Reunion, Morocco, Senegal, South Africa and Tunisia.
The latest Kenya National Bureau of Statistics Economic Survey data shows that exports of cigarettes and semi-processed tobacco leaf hit a peak of Sh21.9 billion in 2014 before declining steadily to Sh17.7 billion in 2017.
According to AIB, rampant illicit trade still poses a threat to the cigarette business. BAT in its annual report of 2017 revealed that illicit trade stood at 12.4 per cent.
In 2018, it rose to 14.1 per cent and if expected to continue to rise if no tangible action is taken.
Political unrest in Sudan, a key export market that has been undergoing tense political instability will also affect tobacco business in East Africa
” The environment is a little harsh for business which could affect their top line significantly. The same applies to other markets that they export to,” states AIB.
Tightening regulations both within and beyond Kenya are expected to increase pressure on the cigarette’s manufacturer’s sales.
“The operating environment is quite hostile with increased regulations both in Kenya as well as the export markets. These ultimately leads to reduced sales for the tobacco manufacturer.”
Kenyans are also going tough times with a reduced household income and this is expected to decrease the volume growth within the Kenyan market.
Increased inflation leading up to increased food prices has reduced the out of pocket expenditure for Kenyans.