East African Breweries Ltd (EABL) cut its short-term borrowings and bank overdraft by Sh4 billion in the six months to December 2014, as it kept an eye on rising financing costs.
EABL financial results, however, show half-year net finance costs went up by seven per cent from Sh2.04 billion in December 2013 to Sh2.18 billion December 2014.
Its short-term borrowings stood at Sh9.67 billion, down from Sh12.54 billion in June 2014, while the bank overdraft dropped drastically to Sh566 million from Sh1.75 billion over the six-month period.
The brewer compensated for this reduction in borrowings and overdraft by increasing trade payables— amounts owed to suppliers for goods or services— by Sh3.46 billion to Sh15.81 billion.
Analysts say this would have a positive impact on interest costs going forward, given that short-term finance tends to be expensive.
Standard Investment Bank analyst Eric Musau said the company would be looking to minimise the interest paid out hence the decision to work around their short-term liabilities.
“The commercial paper borrowing provided the company with flexibility in their finance planning, which allowed them to reduce the borrowings and overdraft. The improved profitability of the company also allows them to do so,” said Mr Musau.
EABL rode on improved cash position with net reserves at Sh2.94 billion when paying down the short-term debt and issuing an interim dividend of Sh1.50 a share.
The net-cash position over a similar period in 2013 was in the negative Sh2.7 billion.
“EABL has been concentrating on bulking up its cash reserves in order to pay down debt, including the Diageo loan,” added Mr Musau.
According to Genghis Capital, paying down debt will have a positive impact on the bottom line of the company.
“This will likely reduce financing costs going forward escalating pre-tax earnings. Coupled with reduced capital expenditure requirements, we anticipate revenue growth to be sustained over the second half of 2015 as a result of efforts made to scale up capacity and revamp their route-to-consumer,” said Genghis Capital research in a coverage note on the EABL results.
In 2011, EABL received a Sh19.5 billion loan from majority shareholder, Diageo to finance the re-purchase of its subsidiary, Kenya Breweries from international beer-maker SABMiller.
EABL reported an increase in overall borrowings for the half year, covering a period when the company carried out significant capital projects as it defended its market share.
The company is, however, expected to cut down on its capital expenditure as it completed major projects, including the new furnace at their Central Glass Industries and an effluent treatment plant upgrade in Uganda.
Cost-cutting from retrenchments, improved manufacturing and distribution networks coupled with improved sales across Kenya, Uganda and Tanzania helped the company grow its half-year net earnings by 11 per cent to Sh4.6 billion.
According to Mr Musau, the business is in a good position although excise tax remains a concern in an environment where the government is looking for ways to raise additional revenue.