Harsh laws could choke cigarette firms’ returns

An increasingly stringent regulatory environment on tobacco in Kenya poses a major risk to the future of British American Tobacco (BAT), whose earnings are expected to slow down starting this financial year.

According to a report, harsh laws, while unlikely to succeed in tackling public health concerns, could force out formal players from the market, opening the floodgates of the illicit market. BAT is expected to be a major casualty both from a revenue point of view and from its performance on the stock market.

“While BAT management has proven to be extremely adaptable to regulatory issues, we think the current initiative might be a lot more severe than it has ever been – with the Health Ministry, for the first time, pushing for health over any other priority such as protecting the industry contribution to the economy,” the analysts said in the report released yesterday.

The report is title Facing Regulatory Headwinds and was released by Standard Investment Bank.

While, addressing the company’s annual general meeting yesterday, BAT Kenya Managing Director Chris Burrell said the concern about the impact of regulation has seen them move to court to stop implementation.

“We moved to court recently to voice our concerns regarding some parts of the proposed regulations which are disproportionate, oppressive and contrary to the Kenyan Constitution. While we support evidence-based and balanced regulation and have a proud track record of complying with all laws and regulations, as the deadline approaches, we feel we have no choice but to apply to the High Court to delay the implementation date for the Regulations,” he said.

The chief executive, however, noted that he was optimist about the future of the company if concerns raised about regulations are addressed.

“We are confident of our ability to continue delivering growth and remain focused and committed on our strategy,” Mr Burrell said.

New tobacco control laws, which require cigarette manufacturers to display pictorial health warnings on cigarette packs and wrappers, also impose a two per cent health tax on sales within Kenya.

They become effective next month.

The 2014 Global Adult Tobacco Survey released in November last year revealed that smokers in Kenya spend Sh2.7 billion monthly on cigarettes. The report, which put the number of adult smokers in the country at 2.5 million, further showed cigarette smoking continues to put massive strain on the country’s health-care system.

Tobacco use is one of the commonest causes of non-communicable diseases, which account for about half of all admissions to public hospitals across the nation.

The new laws are meant to curb widespread tobacco use, with the aim of addressing poor health and the social, economic and environmental impact of the crop’s farming, manufacture, sale and consumption.

“This raises the prospect that excise tax to the sector could also be raised drastically in the upcoming national budget due in the month of June,” analysts said.