Companies

EABL posts a Sh6.2 billion half-year profit

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East African Breweries Limited group managing director, Mr Seni Adetu. Photo/JAMES NJUGUNA

East African Breweries Limited sweetened the payout for investors with a dividend of Sh2.50 per share after it reported an eight per cent drop in profit for the last six months of 2009 despite improved revenue and balance sheet growth.

Kenya’s largest manufacturer by market value grew its revenue to Sh18.6 billion on the back of improved sales of the Tusker and Guinness brands that also benefited from upward price adjustments last November.

Mr Seni Adetu, the group managing director, said EABL had navigated a difficult operating environment that was characterized by slow consumer demand to finish in the positive territory.

EABL’s sales volumes fell 10 per cent across the Kenya, Uganda, the Great Lakes and Tanzanian markets, but its impact on sales was softened by price increments on premium and mainstream brands Tusker and Guinness — that managed to post positive growth.

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EABL announced price increase of between Sh5 to Sh10 per bottle in October on selected brands including Tusker, White Cap and Guinness citing rising production costs that had slowed down profit growth, especially in the key Kenyan market.

Some analysts saw the price adjustments as an admission by EABL that price and not volumes will be the key driver of growth this year.

This paid off in the quarter to December when its flagship brands Tusker and Guinness posted 18 per cent and 22 per cent growth respectively despite the increment.

This helped to soften the impact of lower sales from the spirits business, which accounts for about 11 per cent of its revenues, and brands such as Senator, Citizen Special and Allsops.

“It was a half of two quarters. The first quarter volumes were down 18 per cent while in the second quarter it was down 2 per cent despite the price increases in October,” said Mr Adetu.

EABL said the drop in volumes reflects the many challenges it has been grappling with, including a harsh economy that has eroded consumer purchasing power and depressed consumption across the region.

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“The tough economy impacted on our ability to sell, particularly the senator brand and brands targeting the low end of the market,” said Peter Ndegwa, EABL’s group finance director at an investor briefing.

The drop in EABL’s profitability was mainly the product of cost pressures arising from upward movement of raw material prices and depreciation of the local currencies against major global currencies.

The brewer’s operating profit - a measure of how the core business is performing - was down six per cent to Sh5.5 billion, a pointer that the company is finding it difficult to keep a firm grip on its operating expenses.

On Monday, the firm’s share at the Nairobi Stock Exchange remained unchanged at Sh152 and 5.5 per cent since the start of the year.

Stockbrokers expect the share to remain stable despite the drop in profitability, arguing that most investors buying the counter have their eye on dividends.

Fewer investment opportunities have seen EABL return most of its cash to shareholders in the past five years.

The company has paid out Sh27.4 billion in dividends since 2004 making it the most sought share at the NSE.

It announced an interim dividend of Sh2.50 a share, same level as last year’s.

Now, the firm has plans to intensify its activities outside Kenya to grow profits and reduce it’s over reliance on a market that is headed for maturity.

“Yes, Kenya is our fortress but at the end of the day we are East Africa Breweries and we must play the East Africa game,” said Mr Adetu, adding that the firm is expecting a better second half especially on its spirits business.

The government made a climb down last month and reduced the duty on spirits from 65 per cent to 35 per cent, offering reprieve to distillers whose spirit sales have been on decline as the high prices had pushed a large fraction of alcohol consumers in the bottom incomes bracket to illicit brews and low priced spirits that are yet to be trapped into the taxman’s net.

EABL has also set in motion plans to reinforce its presence in Uganda, the Great Lakes region and Southern Sudan.

Beer volumes have been growing at slower pace since 2007 on account of slowing economy and high levels of inflation that have ravaged consumers spending power.

The Kenyan market saw volumes come down 13 per cent, but its sales and operating profits were up eight and six per cent respectively.

In 2007, the brewer returned double digit growth, much of it driven by the low priced Senator Keg -- which delivers volumes but less value compared to flagship Tusker, White Cap and Pilsner brands.

But a price increase on Senator Keg slowed down its growth in the market.

EABL is facing a tough battle for the consumers’ wallets at a time when the economy is showing little signs of recovery.

Kenya’s economy remained stagnant in quarter three and is not expected to hit its 2009 growth target of three per cent.

This poor state of the economy, which has culminated into layoffs, freeze in hiring plans and static wages combined with high inflation has weakened consumers earning power leading to a cutback in spending that is hurting most consumer goods producers across the board.

For EABL, a drop in volumes in the Kenyan market that accounts for about 77 per cent of revenues is significant, especially because it comes at a time when the brewer is also facing unique challenges in its Uganda and Tanzania operations.

Uganda Breweries, in which EABL has a 98.2 per cent stake, reported a two per cent drop in volumes and a 39 per cent drop in operating profit mainly due to cost pressures, says Ndegwa.

In Tanzania, EABL is entangled in a legal dispute with SABMiller in a case where EABL is seeking to end a seven year marriage and acquire SABMiller’s rival - Serengeti Breweries.

EABL joined the TBL board in 2002 under an arrangement in which SABMiller agreed to sell 20 per cent of TBL to EABL in exchange for a similar stake in its Kenyan subsidiary.

The two firms had entered into an agreement to manufacture and distribute each other’s flagship brands but EABL argues that it is increasingly getting the short end of the stick.

Mr Adetu reckoned that the marriage will be over by April.

“It’s a question of when and not if,” said Mr Adetu when asked about the Serengeti deal.

Its volumes in Tanzania declined 14 per cent. East Africa has increasingly becoming a battle zone between SABMiller and Diageo, which has a 50 per cent stake in EABL.

SABMiller owns 60 per cent of Nile Breweries in Uganda where a vicious battle for market dominance is underway.

In Southern Sudan, SABMiller opened a Sh2.9 billion plant in April in an attempt to consolidate its presence ahead of the entry of competition into the market.

EABL opened set shop in Juba in the last quarter.