East African Breweries Limited - Imara

East African Breweries Limited
FY 2011 Results & Update - Geared up for regional opportunities in the wake of an exigent
environment in the key market…
07 October 2011
Analyst
Batanai Matsika
+263 772 889 556
batanai.matsika@imara.co
www.imara.co

EQUITY RESEARCH
KENYA
1
07 October 2011
BREWERIES/BEVERAGES
EAST AFRICAN BREWERIES LIMITED
Geared up for regional opportunities in the wake of an
exigent environment in the key market…
EABL has recently concluded the consolidation of Serengeti
Breweries Limited (SBL) and is now in the final stages of
relinquishing its 20% stake in Tanzania Breweries Limited
(TBL) through a public offering in the next few months. SBL is
one of EABL’s “strategic acquisitions” and is expected to
deliver incremental sales and profit growth in the future.
While short term prospects in the key market (Kenya) remain
bleak on the back of skyrocketing inflation (c17%) and a
weakening currency (about KES 100/USD 1.00), the group is
consolidating its position as a leading alcoholic beverage
company within the Eastern Africa region.
• Other consolidation opportunities in the region still
exist. We see further M&A opportunities in which EABL
may participate in the East African region. In a recent
development, Diageo (EABL’s parent company) won a
bid to buy Ethiopia's last-remaining state brewery (Meta
Abo) for USD 225.0m. Indications are that the new
operation will be consolidated into EABL.
• We like management’s focus on cost control. EABL
management has focused more on improving the group’s
operational efficiencies. This has entailed price hedging
for sugar and cereals and outsourcing operations such as
logistics and warehousing. The group has also embarked
on a “brand-value engineering” strategy that essentially
substitutes malt and barley with “cheaper sorghum”.
• Valuation upside. A combination of our two valuation
techniques yields a target price of KES 187 per share.
The share price has taken a knock from its 52-wk high of
KES 230 per share. We think prospects in the region are
encouraging and therefore upgrade our recommendation
from HOLD to Long Term BUY.
BLOOMBERG: EABL:KN
LT BUY
Current Price (KES) 157.00
Current Price (USD) 1.57
Target Price (KES) 187.00
Target Price (USD) 1.87
Upside/ Downside 19.1%
Liquidity
Market Cap (KESm) 124,152
Market Cap (USDm) 1,242
Shares (m) 790.8
Free Float 50%
Ave. Daily vol ('000) 174
Share Price Performance
6 Months (KES) 195 -19.5%
Relative change (%)* -1.9%
12 Months (KES) 192 -18.2%
Relative change (%)* -1.8%
*Relative to MSCI Frontier Market Index
Financials (KESm)-FY 30 June 2011 2012F 2013F
Turnover 44,895 51,629 58,083
EBITDA 14,984 17,038 19,400
Attributable earnings 7,353 8,459 9,164
EPS (KES) 9.3 10.7 11.6
DPS (KES) 8.8 10.1 10.9
NAV/share (KES) 26.9 35.3 36.9
Ratios 2011 2012F 2013F
D/E Ratio 18.4% 16.1% 17.8%
RoaA 16.7% 16.4% 16.1%
RoaE 34.9% 34.4% 32.1%
EV/EBITDA 7.5 5.9 5.4
EV/hl (USD) 134.9 111.3 109.4
PBV (x) 5.8 4.4 4.3
PER (x) 16.9 14.7 13.5
Earnings Yield 5.9% 6.8% 7.4%
Dividend Yield 5.6% 6.4% 6.9%
EBITDA Margin 33.4% 33.0% 33.4%
250
EABL: Price Vs Volume
3,000,000
STRENGTHS
Low levels of gearing
WEAKNESSES
Susceptible to fiscal constraints
200
2,500,000
Supply optimisation and cost leadership
Strong regional presence
Heavily taxed products relative to SSA peers
Growth of illicits/parallels/counterfeits
150
2,000,000
Diverse product portfolio that suits
different market segments
in main markets affects the groups
competitive strengths
100
1,500,000
1,000,000
Reduced reliance on barley through use
of sorghum to lower production costs
OPPORTUNITIES
THREATS
50
500,000
Further regional expansion-Ethiopia, SSudan
Spirits opportunity
Excise duty increases
Drought threats in the EAC region
-
02-Jan-09
02-Mar-09
02-May-09
02-Jul-09
02-Sep-09
02-Nov-09
02-Jan-10
02-Mar-10
02-May-10
02-Jul-10
02-Sep-10
02-Nov-10
02-Jan-11
02-Mar-11
02-May-11
02-Jul-11
02-Sep-11
-
Growing middle class population
Harmonisation of tax regimes in Kenya
as a result of an intergration of EAC
economies
High oil/ energy prices
Competition-SABMillers' competitive
aspirations in Kenya
Weakening of KES and Inflation
Volume-RHS
Price-LHS (KES)
Privatisation of breweries in East Africa
Increased legislation in Kenya & Uganda
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Nature of Operations
East African Breweries Limited (EABL) is an alcohol beverage
business whose main operations are in Kenya while it also has
a footprint in Uganda and Tanzania. EABL also exports its
products to Rwanda, Burundi and Southern Sudan. The
company has breweries, distilleries, support industries and a
distribution network across the East African region. Core
brands include the Kenya’s leading brand – Tusker (the
flagship brand and a Kenyan icon). Other brands include
Tusker Malt, Pilsner, White Cap, White Cap Light, Senator,
Guinness, Allsopps, President and the latest addition,
Windhoek Lager.
Market developments and background
Back to the old days of price wars. Tusker, which is brewed
by Kenya Breweries Limited, is the most popular beer in
Kenya. It is popularly known as "Keroro" beer. It is worth
noting that Tusker is a source of Kenyan pride, highlighted in
the late 1990s, where EABL played the patriotic card to win a
marketing war against Castle Breweries (now Tanzania
Breweries Limited), a subsidiary of SABMiller. In the nasty
media campaign that followed, Castle, which had constructed
a multi-million dollar brewery in the industrial town of Thika,
was depicted as foreign and uncommitted to Kenya. The
prolonged marketing wars came to an end in 2002, when the
two brewers reached a settlement in which they carved out
the beer market in East Africa among themselves. Castle
agreed to exit Kenya, and EABL decided to leave the
Tanzanian market to the SABMiller subsidiary. This was
followed by a selling and distribution agreement between
Tanzania Breweries (SABMiller) and EABL (Diageo). However,
this has since been reversed as EABL will now “go it alone’ in
the Tanzanian market through its investment in Serengeti
Breweries limited (SBL). Meanwhile, SABMiller has agreed to
sell its 20% in Kenya Breweries Limited for about KES 19.5bn
and has made it public that it is keen to “set up shop” in the
Kenyan market.
East Africa remains one of the most attractive beer markets
in SSA. Generally, growth of beer production in the EAC
region has largely been led by Kenya, which is well ahead of
other countries. EABL is the largest brewer in the region and
has a total production capacity in the region of 13.0m hl. The
other major player in the region is SABMiller, which has about
c70% market share in Tanzania and 52% in Uganda. EABL
commands approximately 90% of the beer market in Kenya,
c30% in Tanzania and c45% in Uganda.
FY 2011 Financial Results Overview
Results showed 16% top-line growth. After consolidating
with SBL, the group reported net sales growth of 16.1% y-o-y
to KES 44.9bn (USD 439.1m). The growth was commendable
given the exigent operating environment in the form of the
full effects of the Alcoholic Drinks and Control Act that was
introduced in November 2010 in Kenya. Furthermore, clear
beer pricing in Kenya was affected by an increase in excise
taxes. In Uganda, the use of sachets was discontinued.
Competition in Uganda, Tanzania and Southern Sudan remains
largely heated. Overall, clear beer constituted c75% to total
sales, spirits, 20% and CSDs, 5%.
East African Breweries Limited
FY 2011 Results & Update
Top 5 Shareholder's List
Diageo Kenya Limited 42.82%
Diageo Holdings Netherlands BV 4.55%
Board of Trustees NSSF Board 4.55%
Guinness Overseas Ltd 2.61%
CFC Stanbic Nominees 2.37%
Source: IAS
East African Breweries Limited
Kenya Breweries Limited (100%)
Uganda Breweries Limited (98.2%)
UDV Kenya (46%)
EABL Tanzania Limited (100%)
Serengeti Breweries Limited (51%)
Income Statement (KESm) FY 2010 FY 2011 % ∆
Net Revenue 38,679 44,895 16.1%
COS (19,537) (22,831) 16.9%
Gross profit 19,142 22,064 15.3%
Operating Profit 11,256 12,412 10.3%
Net finance charge 169 (163)
Income from associate 1,144 0
Profit before tax 12,569 12,249 -2.5%
Taxation (3,731) (3,235) -13.3%
Profit after tax 8,838 9,014 2.0%
Attributable earnings 7,179 7,353 2.4%
EPS (KES) 9.08 9.30 2.4%
DPS(KES) 8.75 8.75 0.0%
Balance Sheet (KESm) FY 2010 FY 2011 % ∆
Total Assets 38,421 49,712 29.4%
NAV 23,953 26,888 12.3%
Current Assets 17,359 16,320 -6.0%
Current Liabilities 11,684 15,509 32.7%
Current ratio 1.49 1.05
Cash flow (KESm) FY 2010 FY 2011
Operating activities 12,203 8,878
Investing activities (3,236) (9,735)
Financing activities (7,560) (6,360)
Net cash increase/decrease 1,407 (7,217)
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Imara Africa Securities
Sales volumes up despite a strain on disposable incomes.
Another exciting highlight is that total sales volumes were up 15%
(including SBL). This was achieved through expanded volumes in
the beer and spirits categories. It is worth mentioning that the
group-wide spirits portfolio grew by 56% on the year, indicating
rising demand. There was generally a stable tax regime in the
spirits category. Furthermore, a turnaround in Uganda Breweries
Limited (UBL) in H2 2011 was a major contributor to the increase
in volumes.
FY 2011: Revenues Spit by Product
Spirits, 20%
East African Breweries Limited
FY 2011 Results & Update
CSDs, 5%
Marginal decline in margins. For FY 2011, operating cost
increases on fuel, electricity and the high cost of raw materials
affected the group’s margins. The GP margin declined marginally
by 34 basis points to 49.1% and the cost of goods sold (COGS)
increased 17%. The OP margin lost 145 basis points to 27.6%. The
group registered operating profit growth of 10.3% y-o-y to KES
12.4bn (USD 121.4m).
Source: IAS/Company Reports
Beer, 75%
Profit before tax down 2.5%. PBT of KES 2.25bn (USD 120.0m) was
2.5% lower than the FY 2010 figure. The PBT margin deteriorated
by 521 basis points to 27.3%. This was largely due to the fact that
EABL did not recognise its share of associate, Tanzania Breweries
Limited (TBL). Its 20% stake in TBL was reclassified as available for
sale in 2010. EABL expects to conclude the disposal process,
through a public offer for sale, by the end of October 2011.
A flat performance on the bottom line. The brewer registered
profit after tax of KES 9.0bn (USD 88.2m), representing a 2.0%
growth on FY 2010, as margins declined to 20.1% versus 22.8% in
the prior period. Broadly speaking, we note that performance for
the group was largely affected by once-off integration and capex
costs associated with SBL. Overall, a total dividend payout of KES
8.75 per share (FY 2010: KES 8.75) was declared, implying a
dividend cover of 1.1x.
Operational Review
Kenya Operations
ADCA limiting market place wins. Despite a solid performance in
the spirits category in FY 2011 (spirits volumes up 78% in Kenya),
clear beer volumes declined 1.0% on the year. The flat beer outturn
was also a result of the effect of an increase in excise tax.
However, the Alcoholic Drinks Control Act (ADCA) is limiting
growth in the key Kenyan market. The new Act basically enforces
laws that control the production, manufacture, sale, labelling,
promotion, sponsorship and consumption of alcoholic drinks.
There are also restrictions to the hours within which the sale of
alcoholic drinks is permitted. The overall objective is that of
“protecting” consumers and avoiding irresponsible drinking.
While EABL management has expressed that it is largely
agreeable with the underlying intents of the Act, they have
pointed out that certain clauses of the law do not serve the
intended purposes and therefore there is need to engage
authorities.
Growth in key brands. While the ADCA has generally slowed
down sales in Kenya, EABL has largely focused on promoting its
key brands. The brewer experienced good growth in its key
brands Tusker (+5.0%) and, Guinness (+3.0%), and an impressive
uplift in spirits during the year.
FY 2011: Revenues Spit by Business Unit/Region
Great Lakes, 8%
Tanzania, 5%
Uganda, 12%
Kenya, 75%
Source: IAS/Company Reports
EABL: Financial Analysis
70
60
50
40
30
20
10
-
2009 2010 2011 F2012 F2013
Revenue (KES m)-LHS EBITDA Margin-RHS OP Margin-RHS
Source: IAS Estimates/Company Reports
40%
35%
30%
25%
20%
15%
10%
5%
0%
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Imara Africa Securities
EABL also introduced new packaging for its legendary regional
brand Tusker Lager which contributed to refreshed consumer
awareness and net sales growth.
EABL: Capex Vs Production Volumes
8.00
East African Breweries Limited
FY 2011 Results & Update
12.00
Increased marketing efforts. EABL has reinforced its focus on
generating growth through investing in its brands (including
renovation and customer partnering). Marketing costs for FY 2011
increased 36% to KES 3.5bn (USD 34.2m). Marketing costs are
roughly 10%-15% of turnover. Furthermore, the group increased
its marketing spend on activation platforms such as Tusker
Project Fame and Guinness Football Challenge, which led to the
good growth of Tusker and Guinness as aforementioned. Senator
also benefited from an expansion in the distribution footprint.
Uganda Operations
A surprise H2 2011 performance. Uganda delivered a solid
performance in H2 2011 as a result of enhanced line efficiencies,
better cost management and improved product availability as a
result of an investment in a new packaging line. Bell Lager is also
reinforcing its leadership position in the Ugandan market as
Uganda Breweries Limited (UBL) re-launched the brand in a newlook
bottle. Overall, UBL contributes c12% to group turnover. H2
2011 operating profit for UBL was up 69% on H1 2011, indicating
a swift turnaround.
Tanzania Operations
SBL consolidation concluded. EABL acquired a 51% stake in SBL
for KES 4.9bn in November 2010, in a deal that was funded from
internally generated funds. SBL is the second largest beverage
alcohol company in Tanzania. The company now has an expanded
brands portfolio (PSL, Tusker, Guinness) with three functioning
breweries in Dar es Salaam, Mwanza and Moshi. EABL’s FY 2011
results therefore, have consolidated eight months of SBL financial
performance. SBL contributed KES 4.0bn (USD 39.1m) in net sales
and 7.0% to group volumes. However, the unit posted a net loss
largely due to once-off integration costs of KES 300.0m and
interest cost of KES 200.0m. EABL spent approximately KES 2.0bn
(USD 19.5m) in capex on completing the Moshi plant and on
additional crates and bottles required for SBL. The company also
invested significantly in integrating the business to EABL/ Diageo
standards. This involved integrating all systems and processes
(including financial reporting and, the IT infrastructure.
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
2007 2008 2009 2010 2011 2012 2013
Beer Production (mhl)-RHS
Capex (KES bn)-LHS
Source: IAS/ Company Reports
EABL’s Main Beer Brands
Source: Company Website
10.00
8.00
6.00
4.00
2.00
0.00
EABL International (Great Lakes Region)
The Great Lakes region contributed about 8.0% to group revenues.
Sales volumes were down 10% y-o-y and net sales were up just
3.0%. FY 2011 was a “tricky year” for EABL’s operations in South
Sudan as a result of the uncertainty over the referendum and
scarcity of foreign currency.
Group-wide Operational Review
Cost-value management. EABL management has focused more on
improving the group’s operational efficiencies. This has entailed
price hedging for sugar and cereals (c60% of input costs) and
outsourcing operations such as logistics and warehousing in various
markets. Furthermore, the group has embarked on a “brand-value
engineering” strategy that essentially substitutes malt and barley
with “cheaper sorghum’, without compromising on quality. We
think these strategies are a recipe for margin expansion in the long
term. However, because of the drought, EABL will be forced to
import about 5.0% of its cereal requirements in FY 2012.
Africa Beer Market (m hl)
Central Africa
6.0
7%
English-West Africa
15.0
17%
Source: IAS Estimates
East Africa
14.0
16%
French-West Africa
9.0
10%
North Africa
5.0
5%
Southern Africa
13.0
14%
South Africa
28.0
31%
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Imara Africa Securities
Capex investments remain a priority. The total capex for FY
2011 amounted to KES 6.4bn versus KES 3.8bn in FY 2010. The
capex budget for FY 2012 is expected to be in the region of KES
6.0bn. In Kenya, EABL invested in a new water storage facility
with a capacity of 4,000m³ and upgraded its power supply line
from 11kV to 66kV in an effort to stabilise utility supply to the
plant and reduce power expenses. The carbon dioxide plant was
also expanded to optimise production output. The upgrading of
the malting plant in Nairobi which started two years ago
continued in FY 2011 with new equipment being installed.
Recent Capex Investments
The new Moshi Brewery
East African Breweries Limited
FY 2011 Results & Update
The new Line 4 in Uganda
In the region, capacity enhancement has been ongoing, with a
new 50,000 bottle per hour capacity packaging line installed at
Uganda Breweries Limited (UBL) in Kampala, Uganda in
November, 2010. Other investments include the commissioning of
Moshi brewery in Tanzania. Furthermore, the installation of a
new mash filter also in Uganda is in progress.
Outlook
Leveraging on growing economies in the East African
Community (EAC). The EAC is increasing its population and as a
result, there is a growing middle class in the region. Increased
integration in the EAC provides a solid investment case for EABL
given its dominant position and strong brands portfolio.
Management has indicated that Tanzania and South Sudan will
continue to be the key growth markets. In addition, the group’s
growth strategy will also focus on other East African nations such
as Rwanda, Burundi and Eritrea. Management has also alluded to
the fact that this would largely be done through green field
investments, joint ventures and contract packing/arrangements.
Export opportunities also exist within the region.
In a recent development, Diageo, (EABL’s parent company), won
a bid to buy Ethiopia's last-remaining state brewery (Meta Abo)
for USD 225.0m. Indications are that the new operation will be
consolidated into EABL.
South Sudan looks promising. The new nation of South Sudan is set
to benefit from an “oil-led” economic recovery. EABL has indicated
that it is looking at a more significant presence in South Sudan. An
interesting point is that EABL has a larger share of the beer market
in South Sudan (ahead of SABMiller) but largely operates through
third party distribution agents. EABL has announced that it plans to
build a 700,000hl plant in Juba, in South Sudan, which can be
expanded to 1.0m hl. SABMiller has already invested in Southern
Sudan Beverages Ltd (SSBL) brewery in Juba. The brewery produces
White Bull lager and Chairman’s Extra Strong Beer as well as the
Club Minerals Sparkling Soft Drinks range and Source Pure Drinking
Water. SSBL has also announced it will start the production of two
of SABMiller’s existing brands Nile Special Lager and Club Pilsner.
EAC: 2011 Population and Inflation Statistics
80
70
60
50
40
30
20
10
0
Kenya Uganda Tanzania Sudan Ethiopia Rwanda Burundi
Population (m)-LHS
Inflation-RHS
Source: IAS/Company Reports
EAC: Alcohol per capita consumption (l)
Uganda
6.8
Tanzania
7.0
Rwanda
9.0
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
To leverage on the spirits opportunity. It is worth noting that
parent company Diageo is the world's biggest spirits group. As
indicated in the company’s FY 2011 results, spirits volumes have
grown significantly, supported by tax reprieves and price
increases of premium/mainstream brands. We think that brand
building and market development initiatives within this category
are likely to drive future growth across the main markets.
Kenya
11.0
Burundi
18.0
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0
Source: IAS Estimates
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Imara Africa Securities East African Breweries Limited
FY 2011 Results & Update
COMPETITIVE ANALYSIS- PORTERS’ FIVE FORCES MODEL
Threats of new entrants
Low & Increasing
Capital Intensive Industry. Generally, the huge capex requirements tend to limit market
entry in the breweries sector. However, multinational group SABMiller has indicated that it
will soon enter the Kenyan market. SABMiller already has operations in Tanzania (TBL) and
South Sudan (SSBL).
Regulatory environment. The new Alcoholic Drinks and Control Act (ADCA) poses a serious
threat to any new market participants.
Strong brand loyalty. EABL has already established itself as a leader in the Kenyan market
with a market share of c90% largely through its strong brands e.g. Tusker is the most
popular brand in Kenya. Another factor that limits market entry includes EABL’s operational
scale (economies of scale advantages) and its distribution channels.
Power of Suppliers
Low & Stable
Suppliers of raw materials, components, labour,
and services (such as expertise) to the firm can be
a source of power over the firm, when there are
few substitutes.
Generally, EABL suppliers across all its markets
have little bargaining power in the industry largely
due to the fact that sorghum growers are abundant
within the region. There is also a high degree of
differentiation of inputs as the company has
embarked on brand value engineering, which
substitutes barley and malt with “cheaper
sorghum”.
Competitive Rivalry
Low & Increasing
Rivalry is the extent to which companies compete with one another for customers. It can be
price-based or non price-based and it is measured by the concentration level of the industry.
Factors that increase rivalry are large capital asset requirements and high switching costs.
EABL is a strong incumbent player in the Kenyan beer market and competitors have low
market share.
However, there is evidence of price-based rivalry in Uganda where UBL competes with
SABMiller. In addition, Tanzania could potentially become a highly competitive market.
Substitute Products
Low & Increasing
It has been identified that as per capita incomes improve, consumers tend to move up “the
drinking curve”, preferring clear beer to traditional brews. Furthermore, as they become
more affluent they become “more discerning”.
Generally, substitutes to clear beer are numerous. Customers can easily switch to other
forms of alcohol such as spirits or wines. A key positive for EABL is that it has been focussing
more on spirits.
In terms of CSDs, fruit juices are alternatives but do not have dominant brands and are not
readily available.
Power of Customers/Buyers
Low & Stable
The bargaining power of customers is the ability
of customers to put the firm under pressure,
which also affects the customer's sensitivity to
price changes.
Buyers have little power due to the fragmented
customer base. In addition, EABL controls its
distribution network hence the final outlets. In
addition, buyer concentration is low given that
the brewer operates in various locations across
East Africa.
However, it is worth mentioning that if price
increases are too aggressive, customers may
trade down thereby limiting the ability for EABL
to pass on costs.
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East African Breweries Limited
FY 2011 Results & Update
Valuation
COMPARATIVE VALUATION
Market Cap EV/hl
EV/EBITDA PER PBV Div Yield
Company USDm USD Hist T + 1 T + 2 Hist T + 1 T + 2 Hist T + 1 T + 2 Hist T + 1 T + 2
Bralirwa 244.8 194.5 11.7 5.2 4.2 14.0 10.7 8.8 9.0 8.0 7.2 7.1% 9.4% 11.4%
Delta 894.4 158.0 11.2 7.5 5.4 16.9 12.1 9.0 4.3 3.3 2.6 2.0% 2.3% 2.8%
EABL 1,241.5 134.9 7.5 5.9 5.4 16.9 14.7 13.5 5.8 4.4 4.3 5.6% 6.4% 6.9%
Guiness Nigeria 2,076.5 378.1 10.2 8.3 7.3 18.1 14.7 12.5 8.1 7.0 6.1 4.5% 5.0% 5.5%
Guiness Ghana 171.0 201.7 7.2 5.9 4.8 n/a n/a 25.6 4.4 4.5 4.2 0.0% 0.0% 2.3%
Nambrew 278.5 87.8 5.4 5.1 4.4 10.8 10.4 8.2 2.8 2.3 1.9 5.4% 6.0% 7.5%
Natbrew 96.6 55.0 9.1 9.0 6.6 14.9 13.6 9.8 17.1 16.1 15.1 7.1% 7.7% 10.7%
NB 4,120.2 450.8 11.9 10.3 9.0 20.9 17.9 15.7 12.8 12.1 11.8 2.7% 5.4% 6.1%
Phoenix 114.4 102.3 6.1 5.5 4.8 19.7 17.6 15.7 1.5 1.4 1.2 3.2% 3.6% 3.8%
SAB Miller 61,004 237.6 12.7 10.7 9.7 20.1 16.2 14.6 2.8 2.5 2.3 2.1% 2.3% 2.5%
Sechaba 239.2 102.2 5.3 6.8 6.9 12.9 15.9 16.0 6.3 6.3 6.2 7.8% 6.9% 7.4%
TBL 369.0 131.9 3.4 3.2 2.9 6.4 5.9 5.3 2.8 2.7 2.5 8.2% 8.9% 10.0%
Zambrew 198.8 188.8 11.5 9.8 8.7 20.9 15.4 12.6 4.5 4.3 4.1 0.0% 0.0% 0.0%
Average 197.4 8.7 7.0 6.1 16.2 13.8 13.1 5.4 4.9 4.5 4.1% 4.7% 5.5%
Note: Averages exclude Natbrew
Source: IAS Estimates
A comparative analysis of EABL against its peers in SSA broadly indicates that brewers in East Africa are cheap given an
average EV/hl of about USD 154/hl versus a SSA average of USD 197/hl. An EV/hl of USD 135/hl for EABL, represents a
32% discount to our SSA average. We think there is significant scope for growth given that EABL has a total production
capacity in the region of 13.0m hl. We used a 25% discount on our SSA average of USD 197/hl and applied it to EABL’s
total production capacity. We generated a prospective EV of USD 1.9bn. This indicates a fair value of KES 220 per share.
DCF VALUATION
KESm 2011 F2012 F2013 F2014 F2015 F2016 Terminal FCF 12,771.36
FREE CASH FLOW 6,524.3 12,796.6 9,218.5 10,133.0 10,528.0 12,771.4 Perpetuity Growth Rate 5.0%
Discount Period - 1 2 3 4 5 WACC 19%
Discount Factor 1.00 0.84 0.70 0.59 0.49 0.41 Terminal FCF 92,650.54
Present Value of Free Cash Flow 6,524 10,711 6,458 5,942 5,167 5,247
Implied Equity Value and Share Price
Enterprise Value 126,175.3
Less: Total Debt (1,230.0)
Less: Non controlling Interest (5,587.2)
Plus: Cash and Cash Equivalents 1,649.5
Implied Equity Value 121,007.6
Number of Shares 790.8
Implied Share Price (KES) 153.0
Source: IAS Estimates
Our DCF model generates FCFs over a 5-year horizon and uses a Perpetuity Growth method to calculate the terminal
FCFs. The Capital Asset Pricing Model (CAPM) was used in calculating our cost of equity (ke). As a result, we derived a
weighted average cost of capital of 19%. The method generates a target price of KES 153 per share.
Recommendation
A combination of our two valuation techniques (DCF and Comparative Valuation) yields a target price of KES 187 per
share, representing 19% potential upside on the current trading price of KES 157. The share price has taken a knock from
its 52-wk high of KES 230 per share. We think negative sentiments surrounding competitive threats and the effects of the
ADCA in the key Kenyan market are the main culprits. In addition, the weak price is also a function of risk aversion by
foreign investors given the weak economic fundamentals in Kenya (high inflation, drought and a weakening currency). In
addition, there is also political uncertainty ahead of the elections next year. However, prospects in the region remain
exciting. We foresee solid growth coming in from the spirits business category. We think investors can take advantage of
the weak price and therefore upgrade our recommendation from HOLD to Long Term BUY.
7

Imara Africa Securities
East African Breweries Limited
FY 2011 Results & Update
EABL- 5 YEAR CGR COMPARISON
30 JUNE (KESm) 2006 2007 2008 2009 2010 2011 2012F 2013F 5yr CAGR
Income Statement
Sales 20,907 25,871 32,488 34,408 38,679 44,895 51,629 58,083 17%
COS (7,896) (11,610) (15,007) (17,561) (19,537) (22,831) (25,866) (29,041) 24%
Gross Profit 13,011 14,260 17,481 16,846 19,142 22,064 25,763 29,041 11%
Operational Expenses 'excluding D&A' (4,451) (4,019) (5,338) (4,709) (5,603) (7,080) (6,053) (6,961) 10%
EBITDA 8,560 10,241 12,144 12,138 13,539 14,984 17,038 19,400 12%
Depreciation and Amortization (627) (766) (1,260) (1,581) (2,283) (2,892) (2,065) (2,556) 36%
Operating Profit 7,933 9,474 10,884 10,557 11,256 12,412 14,972 16,844 9%
Net Finance Income/ (Cost) 342 495 624 493 168 (163) (187) (215)
Profit before Tax 8,577 10,636 12,316 11,507 12,568 12,250 13,940 15,102 7%
Taxation (2,167) (3,107) (3,132) (3,244) (3,731) (3,235) (3,624) (3,926) 8%
Profit After Tax 6,410 7,529 9,184 8,262 8,838 9,014 10,316 11,175 7%
Minority Interest (1,018) (1,396) (1,631) (1,378) (1,659) (1,661) (1,857) (2,012) 10%
Attributable Earnings 5,392 6,133 7,554 6,884 7,179 7,353 8,459 9,164 6%
Ratios
Weighted shares (m) 659.0 659.0 790.8 790.8 790.8 790.8 790.8 790.8
EPS (KES) 6.8 7.8 9.6 8.7 9.1 9.3 10.7 11.6
DPS (KES) 4.9 7.3 8.1 8.1 8.8 8.8 10.1 10.9
Dividend Cover 1.4 1.1 1.2 1.1 1.0 1.1 1.1 1.1
Dividend Yield 3.1% 4.7% 5.1% 5.1% 5.6% 5.6% 6.4% 6.9%
Sales (m hl) 7.5 8.5 9.1 9.8 10.5
EV/hl (USD) 157.4 137.3 134.9 111.3 109.4
Growth Ratios
Sales growth 9.0% 23.7% 25.6% 5.9% 12.4% 16.1% 15.0% 12.5%
EBITDA growth 3.0% 19.6% 18.6% 0.0% 11.5% 10.7% 13.7% 13.9%
OP growth 5.8% 19.4% 14.9% -3.0% 6.6% 10.3% 20.6% 12.5%
PBT growth 4.3% 24.0% 15.8% -6.6% 9.2% -2.5% 13.8% 8.3%
Earnings growth 11.0% 17.5% 22.0% -10.0% 7.0% 2.0% 14.4% 8.3%
Margins
Gross margin 62.2% 55.1% 53.8% 49.0% 49.5% 49.1% 49.9% 50.0%
OP margin 37.9% 36.6% 33.5% 30.7% 29.1% 27.6% 29.0% 29.0%
PBT margin 41.0% 41.1% 37.9% 33.4% 32.5% 27.3% 27.0% 26.0%
PAT margin 30.7% 29.1% 28.3% 24.0% 22.8% 20.1% 20.0% 19.2%
Effective Tax Rate 25.3% 29.2% 25.4% 28.2% 29.7% 26.4% 26.0% 26.0%
EBITDA Margin 40.9% 39.6% 37.4% 35.3% 35.0% 33.4% 33.0% 33.4%
8

Imara Africa Securities
East African Breweries Limited
FY 2011 Results & Update
Notes
Capital
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