JSE's most valuable company

Said Simon Raubenheimer of Allan Gray with R6.7bn of the share in unit trusts and a similar amount in its pension and other portfolios: "We have liked it for more than a decade, dating back to when Remgro (JSE:REM) and Richemont (JSE:CFR) were the main holders - even though legislation everywhere has been more and more antagonistic towards tobacco."

Piet Viljoen of RE:CM said the story of BAT was the story of unintended consequences. Government steps to stamp out smoking and more particularly to ban advertising means that there is no longer competition for the Big Five entrenched global cigarette brands. It is impossible for new entrants to get into the game. "The annual tax increases in every country gives the company a tax umbrella and because they are based on percentages help improve margins. There may be less and less sticks but there is more revenue per stick."

Viljoen said RE:CM was not interested in market capitalisations or positions of a company in the index fund. It is interested only in price versus value. In his opinion, BAT's price is at fair value, so RE:CM is not an accumulator. It also avoided being moralistic in investment. "I gave up smoking a year ago because it is dangerous. It is also dangerous to make moral judgements. That is how you get a nanny state. A car can be dangerous if you drive it at 180km/h."

Raubenheimer said the big-five global producers accounted for 80% of legal cigarette sales. BAT has strong brands, long-term customer loyalty and it is geographically diverse, being in 110 countries. Governments appear to be trying to stamp out smoking but most treat the big cigarette companies as partners in tax raising. Governments find tax raising through the companies easier. They make ten times more out of cigarettes than the companies do. Raubenheimer said there was no reason to sell, when BAT paid two thirds of earnings out in dividends and is busy with share buybacks.

While the incidence of smoking has fallen in First World countries such as the US and Australia, in Europe it is not falling off a cliff. Meanwhile in Africa and Asia more and more people are lighting up. "Just population growth should underpin demand, even if the incidence keeps falling. World population is predicted to grow to 12bn from the current 7bn in 2015. Because only about 6% of income stems from SA, BAT is also a great rand hedge.

BAT has 200 brands including Dunhill, Kent, Lucky Strike, Pall Mall, Vogue, Viceroy, Rothmans, Kool, Peter Stuyvesant, Benson & Hedges, State Express and John Player. It sold 705bn cigarettes in 120 markets in the year to December. The company reported turnover of £46.1bn and profit from operations of £4.7bn (up 9%), earnings per share up 11% to £1.946. It pays 65% of earnings in dividends. The dividend of 126.5p doubled in five years. The share is up 41% on the year to R391.88.

Jannie Immelman, statistician at the JSE, said BAT might have the biggest market cap but because only shares on the SA register are taken into account, it amounts to only 2% of the Top 40 index. Because it falls under the Reserve Bank's definition of an "inward foreign listing", the biggest share in the index is BHP Billiton at `12.5%, followed by SABMiller (JSE:SAB) at 10%, Anglo 9.5%, Richemont 6.5%, MTN (JSE:MTN) and Sasol (JSE:SOL) (both 6%). Top 40 index funds have to purchase these shares according to these weights.

The top ten market caps at the end of March were: BAT, BHP Billiton, SABMiller, Anglo American (JSE:AGL), Sasol, MTN, Richemont, Kumba, Standard Bank (JSE:SBK) and Naspers (JSE:NPN). A decade ago in March 2002, Anglo topped the list, followed by BHP Billiton, Richemont, Anglo Plats, Sasol, SAB, Old Mutual (JSE:OML), AngloGold, Gold Fields (JSE:GFI) and Impala. A number of quality companies more or less held their rankings of a decade ago in spite of some yo-yo-ing in between - Standard Bank, Sasol and FirstRand (JSE:FSR).

Big moves down in the past ten years have been: Old Mutual (from 7^th to 16^th), Sappi (JSE:SAP), Liberty ( 16 to 47) and Murray & Roberts (from 69 to 81). Some of those that moved up the market cap ranks are: MTN (to 6^th from 18^th as M-Cell), Kumba (8 from 22), Naspers A (10 from 73), Shoprite (JSE:SHP)(21 from 54) and Aspen (26 from 65).

This article was first published on www.moneyweb.co.za