Ceylon Tobacco grows profits despite dip in cigarette sales

Mega returns for investors in CTC shares

Ceylon Tobacco Company PLC (CTC), the monopoly manufacturer of legal cigarettes in Sri Lanka and the largest contributor to government revenue, has seen its attributable profit grow to Rs.9.14 billion in the year ended December 31, 2013 from Rs.8.43 billion the previous year despite a 6% volume drop in sales.

The company’s Chairman, Mr. Susantha Ratnayake, attributed this to "weaker consumer sentiment due to pricing and the twin shocks of drought and flood in various parts of the island continuing from late 2012.’’

"The company has delivered a profit after tax of Rs.9.1 billion which allowed us to propose a total dividend distribution of Rs.48.75 per share for the year to our valued shareholders," he said.

"I am extremely pleased with the performance of your company in what was a difficult year where we have continued to grow our bottom line. Well run companies continue to focus on cost and sound management practices and that is exactly what CTC has demonstrated."

Ratnayake pointed out that CTC had during the year contributed Rs.76.5 billion to government revenue, up Rs.5.3 billion from the previous year, and pledged that the company "will continue to support the growth of the Sri Lankan economy over decades to come as we have done in over a century."

He noted that CTC’s shares had performed exceptionally well on the Colombo Stock Exchange in what was a moderate year for the bourse by outperforming the All Share Price Index by as much as 43%.

"If a shareholder had invested Rs.1,000 in CTC shares on 1 January 2009 and sold these shares on 31 December 2013, total return would have been Rs.23,596, including share price appreciation and dividends, providing a total gain of 2,260%," he pointed out.

Ratnayake reported what he called "the emergence of unfair enforcement by interest groups" who had arbitrarily attempted to force their dealers to stop selling cigarettes in certain areas.

While the company had engaged with the concerned authorities to manage this situation, he urged the government and local authorities, specially the police, to take strict action against such illegal acts which disrupt business impacting on returns to the government, the company and their dealers alike.

"The tobacco industry is a legal business that has been in existence for over a hundred years. As a responsible business, we pursue our commercial objectives in ways consistent with changing expectations of a modern tobacco business and despite being in a controversial industry; CTC and BAT have always kept the best interests of our consumers and stakeholders at heart," he said.

Ratnayake also expressed the need to maintain the pressure on smuggled cigarettes. The disadvantage of high prices for cigarettes is that the country had become a lucrative destination for smugglers and the last year the Customs had confiscated over Rs.1.3 billion worth of illicit cigarettes.

Over the years, CTC had built a great partnership with law enforcement authorities through sharing resources, information and education on curbing the menace of illicit cigarettes, he said.

CTC’s MD/CEO, Mr. Felicio Ferraz, discussing the proposed 80% graphic health warnings on cigarette packaging said that the company was not in principle against such warnings.

"We are in favour of informing consumers of the health risks involved with smoking and this is done via a health warning to which we are already compliant under existing regulations," he explained.

"What we are not in favour of is excessive regulation such as the proposed 80% warning on the front and back of the pack face. We strongly feel that it infringes upon our intellectual property and brand communication rights – and that it is excessive, which are some of our contentions before court."

Ferraz attributed the volume decline in cigarette sales seen during the year under review to a mix of factors including pressure on the disposable income of consumers, pricing and smokers turning to beedi going up in 2013 despite a decline seen over the past ten years.

He also said that there had been unfair enforcement by sections of the law enforcement authorities restricting and imposing penalties on their dealers selling their legitimate product.

"In some areas of the country, our trade partners were forced to stop selling this legal product. There is a huge lack of understanding and awareness on this matter. In addition, consumers are uncomfortable to exercise their right to smoke as permitted under the law because they may be unaware of and victimized for smoking in areas where they are permitted to do so," he said.

"These factors collectively contributed immensely to our sales performance this year, and we have engaged with law enforcement authorities and our trade partners to educate them on the situation."

CTC has a stated capital of Rs.1.87 billion and retained earnings of Rs.2.44 billion in its books. The company’s total assets ran at Rs.15.17 billion and its total liabilities at Rs.10.85 billion.

Earnings per share were up to Rs.48.80 during the year under review from Rs.43.64 a year earlier and net assets per share were up to Rs.23.04 from the previous year’s Rs.20.26. The market price per share for 2013 closed at Rs.1,184.

British American Tobacco Holdings (Sri Lanka) BV holds 84.13% of the CTC followed by FTR Holdings SA with 8.32%. All other shareholders individually hold less than one percent of the company.

The directors of the company are: Messrs. Susantha Ratnayake (Chairman), Felicio Ferraz (MD/CEO), M. Raza, A. Hewage, Ms. Premila Perera, Henry Koo and Ariful Islam.

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