EABL takes on SABMiller with a Sh3.9bn war chest

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East African Breweries Limited is set to invest Sh3.9 billion to boost beer production in the region in an effort to protect its market that has come under renewed attack from rivals SAB Miller and Heineken.

The brewer will build a canning plant in Kenya to help boost the uptake of its products outside the traditional bars and restaurants as regulations restrict beer consumption.

It will also build a bottling plant in Uganda to capture a larger share of growing market that has caught the eye of SAB Miller that is building a second plant in the country—underlining the growing beer wars.

“We are going to make investments of between ?25 million and ?30 million to grow our capacity and enhance our distribution channels in the region,” said Seni Adetu, the chief executive of EABL.

EABL is betting on the investments to support growth that saw it announce a 17.3 per cent rise in net profit for the six months to December to Sh4.8 billion on revenues of Sh27.7 billion, reflecting a 36 per cent growth.

The profit growth was cut by increased investments in plants, higher financing costs and a depreciation of the Kenya shilling in the period under review.

Analysts at Standard Investment Bank (SIB) say the new investments could reduce EABL’s dividend payout for the full year despite the company expecting Sh6.3 billion from the sale of a 20 per cent stake Tanzania Breweries Limited.

“Despite healthy cash flows, we see the additional investments leading to a lower payout, despite the expected full year earnings per share,” SIB said in a statement to investors.

EABL maintained its interim dividend payout at the same level as last year’s Sh2.50 per share and new investments including the purchase of a 20 per cent stake in SAB Miller is expected to pile pressure on its cash.

It borrowed Sh20.7 billion from its parent company Diageo to buy the stake. Its cash pile has reduced from Sh8 billion in July 2010 to Sh2.6 billion in December 2010 and Sh1.52 billion in December.High taxation and increased costs–especially those brought by volatility in the currency market and commodity booms–include the major challenges that EABL will have to navigate in coming months.
Its share price rose to Sh179 at the close of trading on Friday from Sh176 on Thursday and has shed 5.2 per cent in the past year—making it one of the most resilient counters at the Nairobi Securities Exchange where firms have shed upto 35 per cent over the period.
It needs to defend and grow its share of the regional market—which is increasingly becoming a battlezone among multinationals SABMiller, Heineken and Diageo led EABL that has plants in Kenya, Uganda and Tanzania with distribution networks in Rwanda and South Sudan.
Regional office

Already, a vicious battle for dominance is underway in Uganda between Uganda Breweries, owned 98.2 per cent by EABL, and Nile Breweries, which is 60 per cent owned by SABMiller–which is opening a second brewing plant in Uganda at a cost of $80 million (Sh6.6 billion).

SAB Miller has also re-entered the Kenyan market with a focus on the premium market with brands like Miller Genuine Draft, Redds and Castle Lager – a segment that has also caught the eye of Heineken, which recently opened a regional office in Nairobi.

In Tanzania, Diageo through EABL ended a partnership with SABMiller over the running of Tanzania Breweries Limited and bought a majority stake in rival Serengeti Breweries where it has increased investments.