Carreras Keeps Fire Burning Despite Higher Tax Burden

• Carreras Limited (CAR) kept the fire burning in Q2 2026 despite the higher Special Consumption Tax (SCT), with net profit increasing 15.3% year-over-year (YoY) to J$1.94Bn for the three months ended June 30, 2026 (Q2 2026). The quarter provided the first indication of CAR's performance under the higher SCT, which took effect on May 1, 2026, increasing the tax on cigarettes from J$17.00 to J$20.00 per stick.
• Revenues rose 4.6% YoY to J$5.76Bn, supported by a portfolio-wide price increase implemented during the quarter, which helped offset the expected decline in cigarette volumes following the SCT increase. The company also reported an improvement in direct cost, which was down 3.4%. Reflecting improved pricing, favourable mix and continued cost discipline, gross profit rose 10.8% to J$3.43Bn, with gross margin expanding by 340 basis points to 59.6% from 56.2%.
• The stronger gross margin flowed through to the bottom line, underpinned by disciplined expense management. Administrative, distribution and marketing expenses were broadly flat at J$860.24Mn, while lease interest expense declined 20.5% to J$17.65Mn. Consequently, profit before tax advanced 15.7% to J$2.59Bn. Although income tax expense increased 17.0% to J$652.54Mn, earnings growth remained robust, with net profit margin widening to 33.7% from 30.6%. The earnings performance highlights the Company's ability to protect profitability despite the near-term volume pressure associated with the higher cigarette tax.
• The Q2 performance added to Q1 combined to create a particularly strong first half, with H1 2026 revenue rising 28.0% YoY to J$12.69Bn and net profit increasing 43.9% to J$4.45Bn. Topline benefited from higher year-to-date volumes as well as the Q2 price increase, while gross profit advanced 30.6% to J$7.45Bn, lifting  gross margin by 120bps to 58.7%. Meanwhile, administrative, distribution and marketing expenses declined 2.7% to J$1.59Bn, underscoring continued cost discipline.
• The combination of robust earnings, strong operating cash flow and a relatively healthy liquidity position reinforce CAR's capacity to maintain attractive shareholder returns while preserving financial flexibility. Cash generation remained a key strength, with operating cash flow increasing 18.3% to J$5.45Bn in H1 2026, while cash and cash equivalents rose 45.7% to J$3.29Bn. Strong liquidity supported continued shareholder distributions, with dividends paid increasing 7.5% YoY to J$4.17Bn.
• Looking ahead, the higher SCT is likely to remain a key factor influencing CAR's performance during the remainder of 2026, with the Company expected to balance further pricing actions against consumer affordability, cigarette volumes and the risk of increased illicit trade. While the initial Q2 results suggest that pricing has successfully cushioned the impact of the tax increase on revenue and margins, sustained volume pressure could become more pronounced in subsequent quarters. Nevertheless, the continued expansion of CAR's Vuse (e-cigarette) and reduced-risk product portfolio, alongside disciplined cost management and efforts to mitigate illicit trade, should provide some offset while supporting the preservation of profitability and market share.
• CAR’s stock has increased 87.7% year-to-date, closing at $33.99 on Monday, August 17, 2026. At its current price, CAR trades at a price-to-earnings (P/E) ratio of 20.7x, representing a sizeable premium to the Main Market Distribution & Manufacturing average of 14.85x. The premium suggests that much of CAR's strong earnings momentum is already reflected in the share price.

(Sources: JSE & NCBCM Research)