East Africa: East African Breweries sees growth in dividends
With EABL last week reporting a 22 per cent increase in pre-tax profit of Sh8.6 billion on revenues of Sh34.8 billion, many investors are wondering which other heights remain to be scaled by this brewing firm. With the EABL selling at Sh154 at market close on Friday, the stock has gone up by 54 per cent since it was split at Sh100 last year.
To gain more insights into the challenges and the direction that the company faces, Group Managing Director, GERALD MAHINDA made a statement and answered questions:
“During the past one-year, we have already seen a pick up in consumption both of the branded and illicit alcohol. We would expect that with the economy showing signs of maintaining the growth momentum, this trend should continue.
We believe that if the economy grew by the official projection, five per cent consumption of total alcohol should grow in line with it.
However, the growth of our branded beer depends on how many people we are able to convert from unbranded to branded segments. We have invested heavily, especially in Senator in order to achieve this.
How robust are your spirit brands and the operations in Uganda? Do you expect them to start contributing an even bigger share to revenues and profits?
We have the strongest brand portfolio in Kenya and Uganda. Our spirits brands in Kenya comprise both international brands such as Johnnie Walker and Smirnoff and local brands such as Richot, Bond 7 and Kane Extra in Kenya, and Waragi in Uganda.
We believe that our business has weathered the turbulence that has been seen in the spirits market, since the ban on sachets, and is now on a growth footing. And we continue to spend more on advertising and promotions to grow the business. There is still a lot of potential for the spirits business, in both Kenya and Uganda. In future, we would see it contributing more to our bottom line.
Our operation in Uganda is now strong. After a period of investment, profits this year are up 100 per cent. We would like to see the business making a higher contribution to our overall business, and we believe that in future it will.
The strength of our brands in Uganda [the flagship Bell], our Pilsner and now Senator, Tusker and Guinness should deliver on these expectations.
We are now using local barley to brew Senator in order to promote use of local raw materials and to take advantage of beneficial tax by the Government.
However, we are not complacent, as we face more direct Competition. Against the background of a slow-growing beer sector, we need to be cautious about our forecasts.
We, however, believe that we have a franchise whose potential can be exploited further
Are there any major capital expenditure projects planned in the next three years?
In the past 12 months we have spent approximately Sh3.5 billion, mainly building additional capacity for beer and spirits at KBL and UBL.
Going forward, we will need to expand our packaging capacity, and in our plans over the next three years, we will invest in another ultra modern packaging line.
This would cost approximately between Sh1.5 and Sh2 billion.
We will also be undertaking other capital expenditure projects on the brewing side, which in total will be in the region of Sh500 million to Sh1billion. In total, we will spend close to another Sh3 billion in additional capital expenditure.
EABL is spewing out so much cash, yet holding much more in reserves. Is it wrong to expect even higher payouts in the coming periods?
We maintain a stable dividend payout ratio (by increasing dividends in proportion to the increase in earnings).
As our profits grow, we expect to pay higher dividends in absolute terms. On the cash side, we continue to look for opportunities to invest the cash that we hold in the factory, distribution and route to market, brands and brand building. It will be a combination of organic and inorganic growth, and our investment in Senator is a good example.
As a result of investments that we have made, and a higher dividend payout, our cash balance has now stabilized despite increased profitability.
What major challenge could the company and its brands possibly face in the near future?
The main challenge that EABL faces is that we do not have a level playing field - from a point of regulation on quality (Kenya Bureau of Standards) and taxation, and lack of involvement or consultation of stakeholders in making major policy decisions, such as banning alcohol advertising. We believe that we have strategies to address these two areas, and we will continue to demonstrate to the Government and other stakeholders that we make a positive impact on the economy.”
East African Breweries Ltd is East Africa's leading branded alcohol beverage business and has an outstanding collection of beer and spirits brands. With breweries, distilleries, support industries and a distribution network across the region, the group's diversity is an important factor in delivering the highest quality brands to East African consumers and long-term value to East African investors.
EABL has an annual turnover of Kshs 30 Billion and it has the largest share of the beer industry in the region. The group employs more than 1000 people across East Africa. EABL has been awarded the accolade of the "Most Respected Company in East Africa", five years in a row (2000, 2001, 2002, 2003 & 2004) in a survey conducted by Pricewaterhouse Coopers and the Nation Media Group.
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