Contract manufacturing helped boost cigarette maker British America Tobacco Kenya profits, but concerns remain over the company's ability to maintain the growth trend after June when the Tobacco Control Act comes becomes operational.

Shareholders expressed fears of business failure because of the increasing anti-smoking lobbying and the possibilities of legal suits from affected smokers.

During the company's Annual General Meeting yesterday, shareholders urged the company to diversify to bio-fuel and optimise its earnings from carbon credits trade.

The Tobacco Control Act bans tobacco industry advertising, promotion and sponsorship. It prohibits sales of cigarettes to minors, bans single-stick and sale of cigarette through vending-machine.

The Act also requires the Ministry of Finance to regularly increase taxes on cigarettes. It will create a national Tobacco Control Board with powers to implement and enforce the new legislation.

These measures are expected to affect cigarette sales with subsequent implication to the BAT Kenya's cash flow.

But the company said it is not worried and welcomes the Act ,saying it will ensure that the industry is on a level playing ground.

Managing director Nicholas Maistre said the company was betting on smokers to adjust their lifestyles as it has happened in the rest of the world.

In some European countries, the cigarette industry has been slapped with stringent regulations including ban on public smoking.

But data from several European countries shows that cigarette sales go down briefly immediately after the introduction of the rules only to pick up later. The company is also betting on expansion of contract manufacturing to 14 countries across the region.

BAT Kenya has invested heavily on new production lines in anticipation of growth in this segment of business.

The company said its contract manufacturing grew by 23 per cent in 2007 compared to the previous period and that domestic sales also grew by 12 per cent.

It subsequently announced a final dividend of Sh17 per share, the highest it has paid in its history and the highest for a listed company this year. Its earning per share was Sh13.86 compared to the previous years Sh12.01.

BAT Kenya chairman Evanson Mwaniki said the high dividend was a cash reward to the shareholders who have been calling for bonus shares over the years. He said the decision to issue bonus shares will be taken when the company finds a better way to calculate excise duty with the Government.

The company said this happened despite anti-public smoking by laws that were put in place by the Nairobi City Council, Mombasa, Naivasha and Nakuru municipal councils.

Introduction of two new brands into the Kenyan market; Dunhill and Pall Mall also helped to increase the company's trade volumes. Both brands recorded a sales increase of 125 per cent last year compared to the previous year.

Mr Maistre said crackdown on illicit trade was one of the factors that contributed towards our volume growth in 2007. Other factors were development of our portfolio strategy and improvements in our distribution capability.

BAT Kenya said about 8 to 12 per cent of the cigarettes on sale in the Kenyan market are contraband.

Earlier this month, a British anti-tobacco lobby known as ASH said in a report that profit achieved by the global tobacco company in Africa was causing ill health and deaths.

The ASH said while smoking is declining in the West, BAT's profits in Asia and Africa grew by £2 million to £470 million last year. But BAT corporate and regulatory affairs manager for sub-Saharan Africa Keith Gretton refuted the claims saying BAT's profit in Europe grew from £781 million to £842 million last year-an increase of over £60 million.