EAST AFRICAN BREWERIES LIMITED

INVESTMENT GUIDE: EAST AFRICAN BREWERIES LIMITED
Looking into the future with faded optimism
 14% cut to our PT due to higher risk free rate:
We have readjusted our risk free rate to reflect a higher 10-year paper yield (12.8%, previously 11.6%) in our valuation – as yields on government papers continue to edge upwards.


 
As a result, our new price target of KES 240.00 is 14% lower than our previous estimate, and this implies a potential downside of 23% from the current share prices of KES 310.00. Although EABL shares have gained 16.1% YTD (year to date), they have outperformed the NSE 20 which has a 15.6% return YTD. Although we expect EABL to return to strong double digit EPS growth in 2014F, EABL‟s valuation has run well ahead of our expectations. As a result we retain our Underweight rating.
 Weak balance sheet dims the company outlook:
The KES 19.5b Diageo loan continues to erode EABL‟s bottom-line performance. In addition, the negative cash position (-KES 4.9b) signpost a possibility of maintained short-term financing (overdraft) resulting to higher interest payments.
From our valuation, we expect the company’s cash flow position to remain in the red in FY14F. In FY13 (for year 2013), EABL‟s PBT declined by 27% y/y to KES 11.1b. The underlying PBT (excluding one-off gain worth KES 3.6b from the disposal of its 20% stake in TBL owned by SAB Miller) was down 5%y/y underpinned by 85% decline in finance income to KES 174m compared to KES 1.2b prior year.
In FY13, EABL has outlined KES 6b worth of CapEx for a new glass bottling plant in Kenya and revamping of its regional distribution networks. We believe the liquidity constraints will result in reduced CapEx.
Expenses rally at a faster rate compared to revenue growth:
FY2012 gross profit margin stood at 46.6%, weaker compared to 48.4% prior year. Going forward, we believe that the gross margin will on average improve to 47%, though at a slower pace compared to FY12A underpinned by high costs of raw materials, increased import charges, high distribution costs and escalating utility costs.
Cost of sales grew by 10.1%y/y to KES 31.6b, exceeding a 6.5% rise in revenue to KES 59.1b. The company attributed the jump on COGs to high energy prices, increased warehousing and distribution expenses and a significant increase in import charges going into Tanzania.
Along with the company’s cost management drive, we believe that it will contain its expenses especially with the localization of beer production (Guinness, Tusker malt lager and Senator in Tanzania) and sourcing of local raw materials including sorghum.
Slow mainstream beer growth:
Mainstay beer portfolio grew at a slower rate compared to the spirits and high-end liquor markets. Mainstream beer brands (Tusker, Serengeti and Bell) recorded 3%y/y growth in NSV compared to reserve spirits like Johnnie Walker that grew by 276%y/y ((year on year). The spirits brand presents a significant growth potential owing to changes in consumption patterns. “Ready to drink” registered 47%y/y growth indicating increasing female consumption.
We still believe that there is higher growth potential for the radler beer market. Uganda witnessed a weak consumer economy; this was however cushioned by a strong growth in Tusker Malt Lager delivering net sales growth that remained flat on an organic basis.
In Tanzania, despite a 25% increase in excise tax introduced in July 2012, net sales grew by 10% on an organic basis, supported by the good performance of Kibo Gold and Senator. Going forward we expect to see the company establish full operations in South Sudan in a bid to expand its regional market share and boost its revenue as Kenya’s market seems to have saturated.
Outlook:
In 2014F, we forecast improved topline performance driven by improved distribution networks across the region as well as the positive outlook for consumer economies.
We believe the company will maintain low operating costs where we project a PBT margin of 21.3% in FY14F, up from 18.8% in FY13A. As a result, we forecast a 36.4%y/y growth on dividend paid to KES 7.50/share.
For the FY 2014F, we forecast sales and EPS growth of 16.5% y/y and 39.7% y/y respectively. Going forward, management plans to shift its gear to grow the spirits segments at a much faster rate than its beer segment in relation to consumer trends that are unfolding.

 OLD MUTUAL SECURITIES 2014

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