The West Indian Tobacco Company

20 April 2015

Who are the West Indian Tobacco Company?

The principal activity of the West Indian Tobacco Company (known locally as WITCO) is the manufacture and sale of cigarettes and other tobacco related products. WITCO is the leading manufacturer of cigarettes in the Caribbean and currently supplies twenty-two Caricom markets from its main base of operation in Champ Fleur.
The company aims to supply a defined portfolio of cigarette brands to informed adult consumers, supporting the company’s overall business strategy, while at the same time creating value for the shareholders of WITCO.

WITCO is a member of the British American Tobacco Group with its ultimate parent company being British American Tobacco PLC a company resident in the United Kingdom.
The company has a 31st December year-end and the last published results were prepared for the year ended 31st December 2014.

Financial Highlights for the year ended 31st December 2014

The income and expenditure account

On a relatively moderate increase in turnover of 7.68%, WITCO managed to increase profit before tax by 17.76% to $655.1m. The bulk of this improvement is largely attributable to cost saving measures.
In this respect the cost of sales decreased by 4% over the prior year as a result of factory improvements and improved work practices geared to reducing tobacco wastage. The reduction in cost of sales was achieved despite an increase in the commodity prices for tobacco, and an increase in the level of Royalties payable to other companies within the British American Tobacco group for the production of group brands.
Overheads fell by 11% attributable to the benefit of adjustments made to prior year amounts due in respect of technical and advisory fees (amounts that are again due to companies within the British American Tobacco Group).

Earnings per share and dividends per share

As a result of steady performance over the past five years both the earnings per share and dividend per share have climbed steadily.


A stuttering in the growth of the share price

After three successive years of growth for the years from 2011 to 2013 (2011 growth equal to 28.32%, 2012 growth equal to 38.55% , and 2013 growth equal to 41.18%), 2014 saw a plateau in the growth of WITCO’s share price with a moderate increase in price of 1.11%.

A strengthening balance sheet

Over the previous five years WITCO have managed to strengthen the balance sheet of the company with total assets rising at a steady pace.
Total assets have risen from $359m in 2010 to $569.5m by the end of 2014.

Other factors to consider

  • WITCO calculates revenue as sales value net of excise tax due to the governments of countries in which it sells its products.
  • WITCO continued to perform well in its domestic market of Trinidad and Tobago despite a slowing of the economy arising from the effects of falling oil and gas prices internationally.
  • WITCO discloses a substantial contingent liability in respect of a Board of Inland Revenue (BIR) assessment arising from an audit of the company’s 2007 income tax return. Initially the BIR assessed the liability as $18,693,208 but has reassessed this to a lower sum of $7,453,333. The revised amount is not provided for in the financial statements and WITCO has appealed the revised assessment.
  • British American Tobacco through an intermediate company controls over 50.12% of the ordinary share capital of WITCO. Despite being a public company WITCO is controlled by the British American Group.
  • WITCO purchases significant sums from the parent company and other companies within the British American Tobacco group. WITCO states that the prices agreed between related parties for the sale of manufactured goods are based on normal commercial practices between independent businesses. In respect of charges for royalties, commissions, services, and other fees these are based on normal commercial practices as set between independent businesses.
  • The company consistently pays four dividends per year. In the year ended 31st December 2014 the company paid three interim dividends totalling $3.57 per share and a final dividend of $1.94 per share.
  • WITCO has no third party debt with all non-current liabilities being attributable to obligations under retirement benefit plans and other associated employee costs.
  • Increased regulation of the tobacco industry increases the challenges faced by WITCO. While WITCO recognises the need for sensible and balanced regulations which take into account the rights of the consumer given the very real risks involved with the use of tobacco related products, WITCO has consistently expounded the view the flawed regulation (which they state would include measures such as retail display bans and the imposition of higher excise amounts) will simply push consumers into cheaper illegally trafficked products. However WITCO acknowledges that further regulation is coming and is taking steps to prepare the company for the possible effects this may entail.
  • WITCO consistently pays an effective rate of taxation above the statutory rate of 25%.
  • The company faces significant “competition” from illegally trafficked tobacco products with up to 12% of the global volume of cigarette related products being traded on the black market. WITCO considers that the increased presence of illicit brands highlights that criminal elements are “hard at work, avoiding taxes and developing smuggling networks to give themselves a competitive advantage in the market.” WITCO struggles to compete with this illicit trade because the illicit trade itself is not a small time enterprise run by petty criminals, but a wide scale and highly sophisticated operation spread across organised criminal networks. The effect of this should not be under emphasised as it undermines the brands and investment of legitimate manufacturers like WITCO, who operate in a transparent manner, follow the rules set by the government, and pay significant sums in respect of excise tax.
  • Export markets have suffered significantly as a result of poor performance of the tourism based economies WITCO services in the Caricom region.
  • The segmental reporting of WITCO reveals that the domestic market (defined as Trinidad and Tobago) is significantly more profitable than the other twenty-two markets it supplies in the Caricom region.

Key ratio analysis

In appendix one to this blog entry we have included some of the key ratios we have used in preparing this blog entry.

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