East African Breweries (EABL) Releases Full-Year Results

East African Breweries Ltd (NSE: EABL), released their full-year results for the period ended 30th June 2015 with the following highlights:

• Despite nonconforming sales figures, with mainstream beer sales (the traditional revenue driver) declining 2%, EABL produced a 6% increase in net sales revenue to reach KES. 64.42Bn. The slump in mainstream and emerging beers sales versus a 17% upsurge in premium beers, is exemplary of market cannibalism; as consumers move to premium beers due to the associated image and slimming differentiation in price.

• East African Breweries saw growth in all but one of their four markets, like Kenya, Uganda and Rwanda and South Sudan (combined) registered a 3%, 4%, and 53% increment; respectively. Tanzania spelled trouble for the Kenyan-dominant brewery as a 2% growth in the local currency, translated to a decline of the same amount in Kenyan shillings. Initially interpreted as a result of currency volatility, the 2% increase is greatly supported by Kibo Gold’s tripling in volumes and growth in spirits; thus highlighting concern over Serengeti beer sales.

• Profit after tax- that garnered 40% to KES. 9.54Bn- was also a result of a one-off sale of land (valued at KES. 1.8Bn) and cost-cutting measures; as administrative expenses improved by 16%.

• We can expect a subsequent one-off in FY16 with the sale of Central Glass Industries, which has not yet been realized.

• The company’s financial ratios illustrate a similar success story, particularly for shareholders; as earnings per share increased by 40% to KES. 12.10 and dividend yield increased by 140bps to 2%.

Outlook

We recommend a BUY on the EABL share as the target price of KES. 357.3 warrants investors an upside potential of 21%, from the current market price. The amendment on P/E and P/B ratios, down 28% and 6% (respectively) is a result of the current market correction, thus a revaluation reflected across the local bourse.

EABL’s outlook remains positive as cost-cutting and ability to meet obligations increase; illustrated by the KES. 2.8Bn paid towards the Diageo loan and the current ratio. Furthermore, EABL, which accounts for 10% of the company’s revenue, performed surprisingly better than other competitors, such as SABMiller; as South Sudan faces currency shortages and limited access to raw materials.

Counteracting market effects are present in Kenya, where the actions against illicit alcohol boost sales for licensed brewers and increase demand from the retailer.