Class action suits of millions of smokers, tougher regulations and soaring tobacco taxes pose a real danger for tobacco makers, but the soon-to-be listed on JSE British America Tobacco (BAT) conglomerate gives a promise of bright future.

Speaking here on Tuesday, Chairperson Jan du Plessis says tobacco companies are creating more shareholder value "than two decades ago" when most tobacco companies embarked on an aggressive diversification drive on fears that the industry would collapse due to health warnings.

"I have been in this industry since 1981. It's more profitable than before. Our track record show consistent performance and going forward, we're well positioned for further growth," says Du Plessis.

Growth has been consistent and in line with management expectations over the past 10 years.

Since 1999, when BAT listed as a standalone tobacco company following the demerger of British American Financial Services, BAT has delivered a compounded annual growth rate of 9.6 percent in earnings per share.

Dividends grew at compounded annual growth rate of 12.4 percent over the period, and the group is targeting 65 percent payout ratio in the 2008 financial year.

"Communicate with our consumer"

Despite being unable to "communicate with our consumer", BAT shareholder return since January 2007 at around 24 percent, puts it in the top three of world's leading fast-moving consumer goods companies that include SABMiller, Kellogg, Coca Cola and Nestle.

"We have delivered growth," says Du Plessis.

And BAT sees further growth, having singled out growth regions that will not only "feed corporate egos" but also create value for its shareholders, CE Paul Adams says.

Apart from increasing market share in existing markets – as many as 180 with leadership in 50 – BAT is exploring merger and acquisitions opportunities in the North African region.

"Disposable income is growing"

Adams says "disposable income is growing" in North Africa, the Middle East and Eastern Europe, presenting an opportunity to introduce its six premium brands that include Lucky Strike, Kent, Dunhill and Vogue or enter into attractive merger and acquisitions.

The envisaged growth path could, however, be derailed by the outcomes of several law suits in various countries, including claims for personal injury, claims for economic loss arising from the treatment of smoking and health-related claims, and claims for unpaid excise tax.

"[These] could potentially impact on the results of operations or cash flows of the group," it said in its latest annual report

About six cases where the group's unit in the US is a defendant are scheduled for trial in the in 2008, some involving amounts ranging "possibly into hundreds of millions and even billion of dollars," the group said.

Although BAT is unable to quantify the total amounts being claimed, but the combined amounts involved in such litigation are significant, it said.

Other potential dangers include higher tobacco taxes as governments worldwide force smokers to pay more for a nicotine fix through substantial excise and sales taxes.

"Increases in tobacco taxes, or changes in relative tax rates for different tobacco products, or adjustments to excise structures may result in a decline in overall sales volumes," it said.

Higher tobacco prices

Higher tobacco prices could also lead to consumers rejecting the group's tax-paid brands for products from illicit sources, the group noted.

Under pressure from regulatory regimes across the group, the group expects further stringent laws following the World Health Organisation's Framework Convention on Tobacco Control that would potentially impact on volumes and profits.

Regulations generally covers smoking areas, product design, product ingredients disclosures, pictorial warnings, how and where the product is sold for example in supermarkets or vending machine, and above or beneath the counter.

BAT has secured a secondary listing on the JSE following the complex restructuring of the Rupert family-controlled Swiss luxury goods group Richemont (RCH) and its local investment firm Remgro (REM).

BAT will list on the JSE on Tuesday October 28, a move that will put it among the top three largest companies on the local bourse.

AFP