Capital Markets

EABL share tipped to weather August fresh excise tax hit


East African Breweries Limited plant in Nairobi. FILE PHOTO | NMG

The stock of East African Breweries Limited (EABL) #ticker:EABL retains an upside at the stock market despite the coming into force of the inflation adjustment on excise tax that threatens the growth of beer consumption, analysts at Genghis Capital say.

The adjustment will come into force from next month, and will thereafter be effected annually as per the changes carried in the Finance Bill 2018 — suspended Thursday by the courts.

Genghis estimates the company should be able to grow revenue by at least 12 and 10 per cent in 2019 and 2020 respectively despite the tax increments, riding on higher volumes of the lower-end keg beer.

“Changes in excise taxes is the most disruptive of consumption patterns (and sales) of alcoholic drinks, and mostly beer.

“The inflation adjustment is fairly predictable and expected to be stable, but we expect this to have some disruption of constant growth consumption patterns,” said Genghis analyst Gerald Muriuki in a note on the alcohol firm.

“However, the Senator keg plant in Kisumu expected to start production in before December 2018. This will reflect in a volume increase in the first half of the 2019 financial year and expected gross sales growth of 13.8 per cent for the full year.”

READ: New inflation tax lifts water, beer prices 5pc

The brewer is due to release its full year ending June 2018 on Friday next week, which is, however, not affected by the excise adjustment.

Genghis estimates the upside on the stock at about 18 per cent on the then price of Sh211, even though its price to earnings ratio of 21.5 times is higher than the Nairobi Securities Exchange manufacturing average of 20.1.

The current price has also been hit by foreign investor selling, which has been the trend among the big blue-chip counters at the NSE in recent weeks.

Last week, EABL registered the highest net foreign outflows at the market at Sh2.5 billion, which resulted in a 4.1 per cent week-on-week decline in share price to Sh208, before the mini recovery seen this week.