The keg line at the East African Breweries Limited plant in Ruaraka, Nairobi. EABL expects net profit to drop by more than a quarter in the year ended June due to higher financing costs. Photo/FILE
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EABL said that its net finance costs soared, mainly due to a loan of Sh19.5 billion ($223.50 million), taken out in November 2011 from parent company Diageo for the purchase of a 20 per cent stake in Kenya Breweries Ltd.
EABL last year also earned Sh3.6 billion from sale of its stake in Tanzania Breweries Limited to SAB Miller, which was a one-off income.
The East African Breweries expects net profit to drop by more than a quarter in the year ended June due to higher financing costs despite increasing beer prices twice this year.
The regional brewer said that its net finance costs soared, mainly due to a loan of Sh19.5 billion ($223.50 million), taken out in November 2011 from parent company Diageo for the purchase of a 20 per cent stake in Kenya Breweries Ltd from rival SAB Miller.
EABL last year also earned Sh3.6 billion from sale of its stake in Tanzania Breweries Limited through a public offer, which was a one-off income.
“EABL projects net earnings for the year to ended 30th June will be more than 25 per cent lower than reported the previous year primarily due to two factors reported in the previous year,” said the brewer in a statement Tuesday.
“The EABL board is confident that the company will return to net earnings growth for 2014 fiscal year,” added the firm, citing that its sales will be higher compared to last year’s.
The firm’s share has dropped to Sh349 a piece compared to Sh352 at Friday’s close and has gained 55 per cent over the past year on increased demand from local high-net worth investors and foreigners.
The profit warning comes in a period that saw EABL increased beer prices from July 6 citing rising raw material costs.
A crate of Tusker is now selling at Sh2,714 up from Sh2,523, which translates to a Sh8 increase per bottle at the wholesale level and while other products rose by more than Sh10.
This was the second price increment this year after the brewer in March increased prices by Sh10 a bottle.
The regional brewer has been racing to reverse the 14 per cent drop in profit to Sh3.7 billion for the six months to December on account of the high financing costs.
The analysts see the latest price adjustments as an admission by EABL that price and not volumes will be the key driver of growth this year, arguing that the firm has historically resisted attempts to increase product prices from an operations standpoint, but only on tax increments.
The Treasury in the June budget statement issued new tax notices on beer save for the Senator Keg.
“I guess it could mainly be because they are struggling with volumes so pricing becomes the other main tool to raise profitability,” said Eric Musau, analyst at the Standard Investment Bank, in earlier interview.
It declared an interim dividend of Sh1.50 per share, down from Sh2.50 a year ago and investors will be keen to see whether the brewer will maintain the Sh8.75 full year payout it has made to shareholders over the past three years.
The interest on the Sh19 billion- loan, which is set at the Kenyan Treasury bill interest rate plus 1.5 percentage points, together with a sharp rise in interest rates from a year ago caused finance costs in the first half to jump 221 per cent to 2.1 billion shillings, resulting in the profit fall.
Beer sales grew 11 per cent in the half, racing ahead of spirits which increased by nine per cent, a pointer on why the later prices were untouched.
Cost of sales rose by 13 per cent to Sh16.2 billion, outpacing the growth in revenue mainly due to investments in EABL’s distribution network and higher input costs.
The firm introduced new brands like Jebel spirit and Balozi beer in Kenya last year and revived the Kibo beer brand in Tanzania.
