I was torn the other day in my position as a small shareholder in British American Tobacco (BAT) and as the custodian of my elderly mother’s small fortune.
I was in a retail establishment, which must stay nameless, where I spied a rather crudely designed box of cigarettes selling for R10 for a box of twenties. That’s a big difference in price compared to my mother’s favourite puffs — which range from Kent to Pall Mall — that cost roughly four times that. This “price discovery” comes after, in a moment of morbid inquisitiveness, I did a rough calculation of what my mother’s long-held smoking habit had cost over five years. The number was alarmingly large and equal, I worked out, to about 165 BAT shares.
The R10 packs, and that’s presuming the cigarettes are even smokable, would save about 75% of the current puff purchase cost. But — aside from helping the illicit tobacco trade — I would be stubbing, in some small way, my BAT holding. That said, I did hear in BAT chairman Luc Jobin’s AGM speech last week a reference to the perennial question: “Why don’t you just stop selling cigarettes?”
Of course, BAT has already made the hard yards in moving beyond cigarettes — or as the group euphemistically calls them, “combustibles” — covering vaping (Vuse), tobacco heating (glo) and modern oral (Velo). The general feeling is that BAT is still lagging its main rival Philip Morris in pitching healthier alternatives to the much-maligned cigarette — though BAT has started showing good traction in terms of market shares and shifting towards profitability in these new categories.
When I bought my mother a Vape, she tried it once and flung it dismissively across the room. Others, though, seem to make the shift quite easily. BAT generated more than £2bn in new category revenues in the past financial year, and I have not seen any official missive contradicting the claim that the group is still on track to meet a 2025 target of £5bn in new category revenues. As things stand, noncombustible products now account for 12% of BAT’s total revenue — markedly up from just 4% only five years ago. More specifically, in certain key markets, such as Japan, the UK and Sweden, most of BAT’s revenue is generated from noncombustible products. The longer-term overall target remains 50-million new category brand consumers by 2030, which sounds quite reasonable, with BAT’s consumer base for noncombustible products already in excess of 18-million.
Make no mistake, BAT will still need to push hard, with competition sharpening and new innovations always likely
Make no mistake, BAT will still need to push hard with competition sharpening and new innovations always likely. One thing in BAT’s favour is that the balance sheet — a little stretched after the RJ Reynolds acquisition — is looking more robust. BAT has pencilled in cumulative free cashflow of about £40bn (pre-dividends) over the next five years. That should provide some comfort to shareholders who might be fretting about it growing its quarterly dividends, buying back its own shares and signalling a willingness to make bolt-on acquisitions. Of course, events in Russia and Ukraine have dampened forecasts slightly, with BAT expecting full-year constant currency revenue growth of 2%-4% and mid-single-figure constant currency earnings growth. That’s solid stuff, and perhaps a suitable antidote for those punters determined to mess around in the volatility of Naspers and Prosus.
A little less reassuring, however, is a reverse listing deal being concocted at Mantengu Mining (previously Mine Restoration Investments). Mantengu is suspended on the JSE, but is looking to buy chrome ore miner Langpan for R550m in a related party paper deal that proposes issuing 137.5-billion new shares in settlement.
This is a huge deal for Mantengu, which had a market value of just R25m when it was suspended. According to the latest announcement Langpan has a mineral reserve of 2.17Mt of chrome (including platinum group metals) with a valuation of R851m. That, of course, needs to be taken out of the ground. More significant then might be the fact that the audited net asset value of Langpan for the year ended February 28 2021 was R37.4m, and that a loss of R4.4m was recorded over the same period. Mantengu’s figures show an NAV of just under R36m for the six months ended August 2021, and a loss of R6m.
Let’s see what the market thinks of the R550m price tag when Mantengu’s listing resumes.
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