UPDATE 2-East African Breweries FY slides, eyes expansion

* Stakes future profit growth on regional markets

* Costs and turnover rise as volumes flounder

(Recasts, adds analyst, shares)

By Duncan Miriri

NAIROBI, Aug 28 (Reuters) - East African Breweries (EABL) (EABL.NR) is staking future profit growth on regional expansion and cost management after posting a 3 percent pretax fall for its year ended June, its chief executive said on Friday.

Controlled by the world's biggest drinks group Diageo (DGE.L), the Kenyan brewer has rekindled a rivalry with SABMiller (SAB.L) by seeking to exit a contract with Tanzania Breweries TBL.TZ. It also announced job cuts in March.

"We are rather confident with our strategic options," Seni Adetu told investors, referring to regional expansion into markets like Ethiopia, consolidation of its spirits business, cost management and the Tanzania move.

EABL wants to buy a stake in Tanzania's Serengeti Breweries, ending a contract that lets SABMiller exclusively produce and market EABL's products in Tanzania through Tanzania Breweries. A London court has however frozen the move by EABL. [ID:nLI106073]

The deal -- which resulted in SABMiller's closure of its plant in Kenya and reciprocation by EABL in Tanzania -- was signed early this decade to end a hostile pricing war.

During the period under review, EABL's profit grew 26 percent in Tanzania -- it's highest growth rate in the region.

HIGHER COSTS

Unlike Kenya, neighbouring Tanzania has not suffered from drought or political instability and it expects 5-6 percent economic growth this year. [ID:nLT125690]

EABL reported a 3 percent drop in pretax profit to 12 billion shillings ($157.3 million) due to higher costs, a weaker shilling, a sluggish economy and tax rises in Kenya.

"Our business was not completely insulated from all that. Did it affect our performance? Of course it did," Adetu said.

Barley imports rose as the firm covered shortfalls in local supplies caused by a prolonged drought in Kenya, pushing costs up 14 percent to 17 billion shillings.

The Kenyan government raised tax on non-malted beer by 70 percent and 250 percent for spirits during the year, Adetu said.

EABL shares slid 1.36 percent at 0950 GMT to 145.00 shillings from Thursday's close of 147.00 and analysts said they were likely to fall further.

"It (full year performance) has not been factored. We expect a bigger drop of this stock on Monday," said Reginald Kadzutu, an analyst at Amana Capital. He said beer volumes, which EABL said fell by 4 percent, were not likely to improve this year.

"Given a choice between basic commodities and beer, consumers are likely to go for food," Kadzutu said. (Editing by Daniel Wallis and Jon Loades-Carter) ($1=76.27 Kenyan Shilling)