East African Breweries Ltd (NSE: EABL) 1H19 Earnings Note

East African Breweries Ltd (NSE: EABL) announced great 1H19 performance with an EPS growth of 25.1% y/y (KES 6.52 ahead of our expected KES 6.00) from a 13.0% y/y growth in revenue. Half year interim dividend has been increased 25% to KES 2.50, offering a trailing dividend yield of 4.7%. Books closure is slated for 22nd February 2019 to be paid on 11th April 2019. We expect the good numbers and the higher interim dividend to offer the share price a strong momentum from current levels of KES 170. 

Positives:

  1. Performance of key portfolios; beer, spirits and regional markets.Performance was positive across the key product portfolios, mainly Senator Keg which recovered (+35% y/y in net sales) from a setback in 1H18. Per segment, premium beers grew 3% y/y, mainstream (17% y/y), value (16% y/y) and Ready to Drink (RTDs) at 1%. Total beer portfolio rose 12% y/y, the fastest growth in beer over the last 4 years. Spirits grew the fastest at 16% y/y supported by Reserve spirits (54%) and Mainstream spirits (29%). However, premium and value sprits recorded a slight setback, down 3% and 2% respectively. With a responding beer segment backed by the double digit growth in spirits, we expect net sales growth to sustain in the 8-10% band in FY19F. We expect a stable tax environment to anchor our growth expectations.  Overall, gross margin improved to 46.1% from 43.5% in 1H18 due to the better mix from the higher margin spirits, premium and mainstream and beers.  
  2. Regional business, growing sturdily. Over the last year Tanzania has been responding strongly recording +26% y/y in net sale value in 1H19 and 41% in FY18. Serengeti brand propelled this growth by recording a 65% uptake due to increased product promotions and better pricing during the period. We expect performance to continue being positive but not sustain the recorded growth rates as the brand normalizes in the Tanzanian market. Tanzania contributes 12% to group net sales. Uganda grew its net sales by 12% accounting for 16% of total contribution.
  3. 25% higher interim dividend. This indicates management is confident that the company will be able to sustain the higher pay-out going forward. The higher pay-out should give the price a strong momentum from its current levels of KES 170.

Negatives

  1. Current ratio (CR) below ideal 1.0x, at 0.9x. Our key concern was the below 1.0x current ratio which stood at 0.8x in FY18 but has improved to 0.9x indicating progress in maintaining the ideal ratio. The Capital Markets Authority (CMA) offered exemptions as part of continuing listing requirements despite the CR falling below 1.0x. We still expect this to remain at similar levels in FY19 mostly due to the large cash pay-out (approx. KES 2.0Bn) for the interim dividend.

Our View: 
The results were better than expected with the half year period being one of the best in the last 4 years, with recovery of beer which had stagnated following a 46% increase in excise tax in 2015. Second half is usually weaker period, but we do not expect it to be significantly different from 2H18.

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by Genghis Research

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