Why East African Breweries Limited net earnings declined by 38 per cent

EABL Group Managing Director Charles Ireland and EABL Kenya Managing Director Joe Muganda

 

By Emmanuel Were

East African Breweries Limited (EABL) has reported a 38 per cent drop in profits after tax in its full year results ending June 2013.

The brewer’s profits fell significantly because it did not have a huge one off income like it did last year when it earned Sh3.6 billion from the sale of a 20 per cent stake in Tanzania Breweries Limited.

But even so, the brewer’s sales grew at a slower rate compared to previous years.

EABL reported Sh6.9 billion in profit after tax compared with Sh11.2 billion recorded in 2012. The brewer’s sales grew by 6.4 per cent to Sh59.1 billion. 

However, the cost of sales and selling and distribution costs grew by 10 and 11 per cent respectively.

“I think it is a solid performance because EABL is an established brand,” said Charles Ireland, EABL’s group Managing Director. “I am a little bit disappointed speaking about the operating performance.”

EABL’s operating profit, which is the profit from its core business, remained flat at Sh15 billion.

EABL is restructuring its operations, with about 20 to 25 employees set to be retrenched, according to the company.

Shareholders will also be disappointed, as they will pocket modest dividend, Sh5.50 per share this year compared with Sh8.75 per share last year.  At the close of trading yesterday, EABL’s shares rose one per cent to close at Sh308.

It is the first time the brewer has cut its dividend payout in over a decade, a signal of the need to hold onto cash to cushion its investment and aggressively market its expansion plan.

This is also the first time in the last seven years, under a stable economy and political environment, that the brewer has posted a single digit growth in sales. 

In 2009, when the effects of the global recession and the post-election violence took a toll on companies, EABL reported a six per cent growth in sales.

Key challenge

EABL’s challenge is that its main brands, such as Tusker, Serengeti in Tanzania and Bell in Uganda, are not selling as fast. 

Uganda remains a challenge with flat growth in sales due to a tough operating environment where reduced government spending and delays in salaries, which tended to erode the purchasing power of the region’s civil servants.

EABL’s main beer brands reported a three per cent growth in sales in the full year ended June 2013.

“The question is… with the slowdown in that area, what are they pushing to cover that. I think they will have to push more of spirits and engage in geographical diversification,” explained Johnson Nderi, a research analyst at Suntra Investment Bank.

Brands targeting the high-end consumers and women – such as Tusker lite, Smirnoff Ice and Snapp – are doing well.  According to figures released by the company, the combined sales of Smirnoff Ice and Snapp grew by 47 per cent.

The sales of beers targeting low- income consumers, such as Allsopps, Senator and Balozi, are also growing at a slower rate. 

 In the year ended June 2013, sales of beer targeting the low -income grew by 12 per cent, a decline of about 40 per cent these brands posted in previous years.

With the slower growth in beer sales, EABL is looking to push its spirits brands to make up for the difference. The spirit brands, such as ciroc, targeting the high-end consumers are growing sales quite fast.

Although sales for the mainstream spirits like Uganda’s Waragi and Richot have declined during the year under review.