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The outlook of Alcohol and Tobacco Stocks in the face of Covid-19

The outbreak of the Covid-19 pandemic has spelt doom for alcohol and tobacco -related businesses given that health concerns have intensified across the globe. Outlets such as bars, night clubs and the common social spots remain under lock and key as governments grapple to save millions from the contagious disease. In some extreme cases, the sale of alcoholic products has been banned while some have restricted the trade of beer to certain days of the week.  The year 2020 is set to witnesses a marked drop in sales volumes within the alcoholic beverages and tobacco industries.

By their very nature, tobacco and alcoholic beverage companies are subject to a number of regulatory controls given the adverse health and social consequences related to excessive alcohol and tobacco consumption.  Individual faith and lifestyle restrictions advocated by some religions against alcohol and tobacco consumption has also served to somewhat limit the growth of volumes. According to the World Health Organisation (WHO), the harmful use of alcohol results in c2.5 million deaths each year. In addition to the chronic diseases that may develop in those who drink large amounts of alcohol, alcohol use is also associated with an increased risk of acute health conditions such as injuries, including from traffic accidents. Similarly, the tobacco industry is highly regulated as there has been a push by regulators to move towards a smoke-free world. Consequently, there has been a significant reduction in smoking rates in developed countries such as the United Kingdom and Australia.

That said, governments in developing nations like Zimbabwe still need to think carefully about how they deal with alcoholic beverages and tobacco companies. This is because companies like Delta and BAT Zimbabwe contribute significantly to government revenues through taxes. A look at 1H 2020 Government revenues shows that tax continues to account for the bulk of the revenue with collections amounting to ZWL$33.4 billion or 97.6%, while non-tax revenue contributed ZWL$828 million or 2.4% of total revenue. The graph illustrates the contribution of the various revenue heads.

H1 2020 Contribution of Revenue Heads

Source: Ministry of Finance & Economic Development

As shown, Income Tax 32% and Excise Duties 12% are major contributors to the fiscus. Generally, proponents of sin taxes  such as excise duties argue that because activities like smoking and drinking are unhealthy, smokers should pay additional taxes to compensate the government for the additional spending on medical care that their habit will one day cost the treasury. Sin taxes are not only levied to raise funding to compensate society but are also meant to discourage individuals from consuming harmful substances in the first place.  However, the setback is that the goods targeted (alcohol and tobacco) are also addictive and this makes consumers unresponsive to price changes. This, in a way, provides a cushion for the sustained demand for habit-forming goods like beer and cigarettes.

All in all, Piggy likes ZSE-listed Delta and BAT Zimbabwe given that their product portfolios cut across all SES groups in the economy. These companies also provide a solid route to gain direct exposure to Zimbabwe’s consumer growth potential.  However, the continued lock down restrictions will impact negatively on 2020 volumes and we see limited earnings visibility. That said, the companies maintain dominant market positions and have proven management teams. HOLD on to Delta and BAT Zimbabwe!

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