A quality assurance official inspect a beer at EABL plant. The brewer’s after-tax profit dropped 38 per cent to Sh6.9 billion. FILE
What you need to know:
Interest rate payments on EABL's Sh19.5 billion loan borrowed from its London-based parent company Diageo is pegged on the 364-day Treasury bill rate, plus a 1.5 per cent premium.
The coupon rate on the 364-day paper has risen by three percentage points since June to the current level of 11.7 per cent, meaning the firm is repaying the loan at an effective rate of 13.2 per cent.
Beer maker EABL’s plans to bounce back to profit growth could be impeded by the rising yields on Treasury bills.
Interest rate payments on East African Breweries Limited’s (EABL) Sh19.5 billion loan borrowed from its London-based parent company Diageo is pegged on the 364-day Treasury bill rate, plus a 1.5 per cent premium.
The coupon rate on the 364-day paper has risen by three percentage points since June to the current level of 11.7 per cent.
This means EABL is repaying the Diageo loan at an effective rate of 13.2 per cent, from about 10 per cent just two months ago.
“The Sh19.5 billion Diageo loan continues to erode EABL’s bottom-line performance. In addition, the negative cash position (-Sh4.9 billion) signposts a possibility of maintained short-term financing overdraft resulting to higher interest payments,” said Old Mutual analyst Eric Munywoki in a research report following announcement of its annual results.
The brewer’s after-tax profit dropped 38 per cent to Sh6.9 billion, weighed down mainly by a surge in financing costs as well as absence of a one-off gain of Sh3.6 billion booked from the sale of its 20 per cent stake in Tanzanian Breweries.
Net finance costs jumped 15 per cent to Sh3.8 billion in June 2013 from Sh3.3 billion a year earlier, as its bank overdrafts increased by 428 per cent to Sh6.2 billion compared to Sh1.1 billion a year earlier.
Analysts at Old Mutual say they expect the company’s cash flow position to remain in the red next year, which will in turn reduce capital expenditure.
EABL’s capital expenditure also increased due to setting up of a new glass bottling plant in Kenya and the revamping of its regional distribution network in the 2013 financial year.
Suntra Investment Bank head of research Johnson Nderi, however, said that there is a likelihood that the company may have taken steps to cap the level to which the loan interest rate is allowed to rise, in line with common market practice.
“Although we don’t know whether EABL put a cap in place, for such transactions companies normally cap the rate up to which the interest could rise,” said Mr Nderi.
In April, Kestrel Capital held that due to other priorities including capital expenditure and dividend, the loan repayments in the 2013 and 2014 financial years will be much smaller before increasing significantly in 2015-2017.
Factoring in the possible rise in financing costs, Old Mutual set a new price target of Sh240 for the EABL per share, which is 14 per cent lower than the previous target of Sh279.
