EABL unveils Sh4.3bn plant expansion plan

East African Breweries Limited (EABL) will invest Sh4.3 billion in expanding capacity at its Ruaraka-based plant as it seeks to increase efficiency.

The listed firm said the plan, first revealed by an investment banker, is one of its larger capital expenditure projects in the domestic market where it is the main player.

It is the second-major investment announcement in the market coming soon after the Keroche Breweries Ltd’s Sh2.5 billion plant upgrade.

“The focus of the investment will be to drive additional capacity in a new warehousing facility and to step up our operational efficiency at the Tusker Brewery in Nairobi,” EABL group corporate relations director Brenda Mbathi told the Business Daily in a statement.

“This is in addition to improving our supply chain that will greatly enhance our customer service and brand availability across all our markets.”
In the year-to-date, the Diageo majority-owned firm has invested in a canning line and a factory in Moshi, Tanzania.

The investment in Kenya is expected to cost around £30 million (or Sh4.3 billion) targeting external markets.

“The capital expenditure plan will also see an increase in brewing capacity, particularly for the export market,” said a brief by Standard Investment Bank (SIB).

The brewer exports to Uganda, South Sudan, Rwanda and Burundi and the increased capacity could be informed by the latter two markets, according to the SIB analysts.

“The local market is well served. Exports to the international market are mainly for Rwanda and Burundi,” said Eric Musau, a research analyst at the investment bank.

Exports to Uganda are expected to reduce following the completion of a mash filter plant.
“There is, however, upside from the just completed mash filter in Uganda which is now fully operational, which means lower exports from Kenya to Uganda — and potentially better margins in future,” says the brief.

Mashing is a process in brewing that involves mixing milled grain and water and the ability to do this in Uganda means that local materials could be used, which comes with a tax advantage. “They will get the same tax break that SABMiller is enjoying,” said Mr Musau. Uganda’s 2011-2012 budget granted tax relief to encourage the use of local inputs.

Beer brewed with local ingredients of at least 75 per cent (excluding water) is charged a 20 per cent excise duty rate. That brewed from barley grown and malted locally is charged 40 per cent rate while alcoholic beverage made from imported materials attracts a 60 per cent rate. In the financial year 2012 ending June 30, Uganda’s market saw sales increase to 38 per cent from the previous year.

EABL did not indicate where the Sh4.3 billion will be sourced from but Mr Musau said that the most probable source is the Sh19.5 billion loan advanced by Diageo late last year. The UK firm is EABL’s parent company and largest shareholder with a 50.03 per cent stake.

Analysts, however, say that the loan will eat into the firm’s profitability as it is pegged on local interest rates.

“As finance costs in financial year 2012 only accounted for seven months, the company expects a much higher finance charge on the KES loan which is priced off Treasury-Bill,” said the note.

An African beer markets report by investment bank Imara says that EABL’s exports grew by 30 per cent with penetration of the Great Lakes region and South Sudan as the main drivers.

Growing oil and gas prospects in the East African region coupled with the low per capita alcohol consumption makes it a prime investment destination for brewers according to Imara.

For the financial year 2012, EABL sales stood at Sh55.5 billion, a 24 per cent increase from Sh44.89 billion recorded a year earlier. Net profit increased to Sh10.64 billion from Sh7.63 billion or 45 per cent.

Profitability was, however, boosted by the one-off sale of Tanzania Breweries Limited.

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