East African Breweries Announces 6-Month Results

East African Breweries Limited (E.A.B.L) announced results for the 6 months ending December 2015, recording 67.3% y-o-y PAT growth to KES 7.7 BN (79.8% y-o-y Trailing EPS growth to KES 15.22). EPS stemming from continuing operations recorded 16.1% y-o-y growth, factoring out a one-off KES 2.2 BN gain from the sale of Central Glass Industries.

Key highlights:

The Brewer’s net sales recorded 8.2% y-o-y (+26.0% h/h) growth to KES 37.5 BN, on the back of 22% y-o-y growth in volumes. Based on country contribution to top line, Kenya continued to lead the pack, accounting for 74% of EABL’s revenue. Uganda, Tanzania and Inland export markets (S.Sudan, E. DRC, Rwanda) accounted for 15%, 9% and 2% (respectively) to the brewer’s top line, while recording +3%, -3% and -72% y-o-y growth in 1H16. Due to the depreciation of the local currencies against the Kenyan Shilling (-10%, -9% and – 2% of the USH, TSH and SSP), reported y-o-y growth of the country segment’s top line was recorded as -7%, -12% and -74% respectively. Spirits continue to record sturdy growth, with the reserve and mainstream spirits segments recording 45% and 14% y-o-y net sales growth respectively.

The Beer & Ready-to-drink (RTD) segment growth was impelled by 106% y-oy growth in emerging beer brands, notably Senator Keg. The impressive growth observed from Senator’s performance (>100%) stemmed from the reversal of excise duty that was imposed on the alcoholic drink in 2013. Premium and RTD beer segments also recorded fairly strong growth at 10% and 21% respectively. The mainstream beer segment recorded 10% contraction in net sales growth, while premium and emerging spirits brands recorded 8% and 9% y-o-y decline in top line growth. We believe the concurrent contraction in emerging and premium spirits segment with the noteworthy growth in the reserve and mainstream spirits segments to be indicative of product upselling, driven by improving consumer disposable incomes in the spirits segment.

In Uganda, strong growth was noted in reserve and premium spirits segments while Tanzania recorded rapid growth in similar segments, as well as mainstream beer segments due to sturdy mainstream beer segment growth. Depreciating currencies in both markets as well as and reduced consumer spend in Tanzania dampened the strong growth recorded in Kenya (+22% y-o-y) in 1H16. Inland export market growth was faced with the challenges of currency depreciation, market unpredictability in Eastern D.R.C and ripple effects in consumer spend from the political instability in Burundi.

The Brewer’s operating profit margin shed 151bps y-o-y to 24.7% in 1H16 to 24.7%, as administrative expenses outpaced top line growth at 15.9% y-o-y growth to 5.1 BN. Net finance costs however declined 37.7% y-o-y to KES 1.4 BN, courtesy of 47.7% h/h decline in short-term borrowings to KES 5.4 BN. The KES 4.5 BN disposal of subsidiary, Central Glass Industries. Part of the proceeds were used for the Diageo loan repayment (KES 1.3 BN), while we believe the balance was used to pay down EABL’s overdraft facility. The debt payment resulted in a 23.2% y-o-y decline in EABL’s net debt position to KES 22.3 BN. The company’s fixed asset utilization also appears to have improved, evidenced by a 15.7% y-o-y improvement in fixed asset turnover, while a 14.0% and 31.4% improvement in inventory and receivables turnover respectively was noted, despite the brewer’s current ratio increasing to 1.1x, from 0.9x in 1H15.

EABL’s financial position as improved rather significantly following the debt pay down, with the company’s net debt/equity ratio declining from 211.2% in 1H15 to 142.3% in 1H16. The debt/free cash flow ratio similarly improved from 11.1x in 1H15 to 5.1x in 1H16, while interest cover improved from 4.2x in 1H15 to 6.8x in 1H16.

Going forward, we expect EABL to intensify marketing campaigns in Kenya in a bid to strengthen mainstream beer brands, focus on outbound logistics by completing and embedding the route-to-consumer transformation in Kenya and Uganda as well as overall cost containment measures to be the key driver of the brewer’s bottom line growth going forward: Inland export market outlook remains bleak, with the only upside potential stemming from Rwanda’s market.

Based on 29th January’s VWAP of KES 265.00, EABL trades at P/E and EV/EBITDA multiples of 17.4x and 24.5x respectively, relative to a frontier market median of 19.8x and 26.5x respectively, hence we recommend a Hold on the stock at the current levels.

Research by Dyer & Blair Investment Bank.