EABL's profit drops on higher costs and interest payments
Kenyans rubbed their eyes when East African Breweries (EABL), in which Diageo owns a 51 percent stake, released its full year results (end June 2013) in August and posted a 38 percent drop in profit. That was worse than many had expected. And it came despite volume growth of 3 percent, net sales growth of 6 percent and 0.2 percent growth in operating profit before finance costs and exceptional items.
What had happened? Apparently, cost of sales grew 10 percent to KES 31.6 billion (USD 361 million), the brewer reported on 23 August 2013.
The higher cost of sales was a result of higher energy prices, increased warehousing and distribution expenses and a "significant increase in import charges going into Tanzania", Finance Director Tracey Barnes told media.
What was not really emphasised by EABL's management was that profit was weighed down mainly by a surge in financing costs. In November 2011, EABL had to take out a KES19.5 billion (USD 225 million) loan from Diageo to buy a 20 percent stake in Kenya Breweries from SABMiller, while selling a similar shareholding it held in Tanzania Breweries to SABMiller.
As was pointed out, the interest rate on EABL's loan is pegged on the 364-day Treasury bill rate, plus a 1.5 percent premium. The coupon rate on the 364-day paper has risen by three percentage points since June to the current level of 11.7 percent (end of August 2013).
This means EABL was repaying the Diageo loan at an effective rate of 13.2 percent at the end of August, from about 10 percent in June.
Thus, EABL’s plans to bounce back to profit growth could be undermined by the rising yields on Treasury bills.
In 2012/2013, Kenya remained EABL’s biggest market, contributing about 67 percent of the total sales followed by Uganda with 16 percent of total sales and Tanzania with 12 percent. The export market took another 5 percent.
EABL controls 95 percent of Kenya’s beer industry.
For the time being, the brewer has scaled down its regional expansion strategies probably because majority-owner Diageo has said so. EABL had earlier expressed its interest in going into Ethiopia and South Sudan. But Diageo has since bought a stake in Ethiopian brewer Meta Abo, effectively locking EABL out of that market. In retort, EABL has registered a unit in South Sudan while it decides whether to enter a joint venture or operate on its own in the world’s newest country.
To return to double digit profit growth, EABL now plans to concentrate on improving the performance of premium brands, the ready-to-drink category of drinks and high-end spirits, management told media.
For consolation, the Board of Directors recommend a dividend which brought total dividend pay-out to the equivalent of 63 percent of EABL’s profit after taxation. This is in line with other African brewing companies. In its past financial year Nigerian Breweries had a dividend pay-out ratio of 60 percent.
