East African Breweries Limited - Imara

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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 5
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. 6
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