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TOBACCO SECTOR REPORT

On the Global front: The Framework Convention for Tobacco Control (FCTC) welcomed an era of global tobacco regulations. FCTC proposed tax measures, graphic pictorials and restricted advertisement to curtail consumption. Subsequent to the ratification of FCTC in 2005, global consumption volumes were on a steady decline by an average 2.6% between 2008 and 2015. However, tobacco companies acted fast to cushion their revenue by increasing retail prices the effect of which was an increase in retail value by an average of 40% in the similar period. Investment in innovative technology has picked pace to assure consumers of better and lesser risk products. Additionally, to maintain and gain market power, Mergers and Acquisitions (M&A) activity has led to industry consolidation mostly controlled by a few tobacco companies including BAT Plc, Phillip Morris, China National Tobacco Company, Imperial Tobacco and Japan Tobacco. These five globally control approximately 83% of volumes consumed globally.

East Africa tobacco market: In East Africa, some the global companies dominate tobacco markets (above 75% market share) through their subsidiaries; BAT Plc through BATK in Kenya and BATU in Uganda and Japan Tobacco through TCC in Tanzania. We are UNDERWEIGHT on the East African tobacco market, with a 3-Yr revenue CAGR ranging 0.0% - 1.2%.

Kenya: Kenya passed the Tobacco Control Act 2007 which has had difficulties in implementation until February 2017 when the Appellate Court quashed contestations by the tobacco companies. This paved way for implementation of Tobacco Control Regulations 2014. In this regard, we have valued BATK at KES 666.37, a SELL recommendation with a 16.7% downside against the current market price of KES 800.