UPDATE 2-Kenyan brewer EABL's profits hit by higher costs

Fri Feb 15, 2013 8:52am EST

* Says confident about top line growth in second half

* Financing costs leap 221 pct after KBL stake acquisition

* Says gaining market share in the Tanzanian market (Adds details, share price)

By Duncan Miriri

NAIROBI, Feb 15 (Reuters) - East African Breweries Ltd reported a sharp drop in half-year profits on Friday due to a jump in its interest bill, but said sales across the region were still rising, helped by new product launches and growing demand.

The company, controlled by Britain's Diageo Plc, borrowed 19 billion shillings ($218 million) from its parent to buy the 20 percent of its subsidiary Kenya Breweries which was owned by SABMiller's Tanzania Breweries.

The interest on the loan, which is set at the Kenyan Treasury bill interest rate plus 1.5 percentage points, together with a sharp rise in Kenyan interest rates from a year ago caused finance costs in the period to jump 221 percent to 2.1 billion shillings, resulting in a 13 percent fall in pretax profit to 5.8 billion shillings ($66.40 million).

But Chief Executive Devlin Hainsworth told reporters he expected revenue to grow faster after a 10 percent rise in the first half.

"We have got some level of confidence around our top line. We will be looking to accelerate that somewhat and of course we are going to work diligently on our cost base," Hainsworth said after an investor briefing.

Cost of sales rose by 13 percent to 16.2 billion shillings, outpacing the growth in revenue mainly due to investments in the company's distribution network and higher input costs such as the price of buying malt.

Growth in sales was registered across all the markets although sales of low-cost spirits declined in Kenya, the firm's largest market, and slower economic growth in Uganda weakened consumer demand there, leading to growth of only 3 percent.

In addition the financial performance in Uganda was affected by plant investments, the company said.

All the other markets of Kenya, Tanzania and exports to countries like the Democratic Republic of Congo and South Sudan produced double-digit percentage rises in sales.

Hainsworth said he was particularly confident over the outlook for revenue growth due to sales of new brands in Kenya and Tanzania and generally rising demand in Tanzania.

The firm introduced new brands like Jebel spirit and Balozi beer in Kenya last year and revived the Kibo beer brand in Tanzania.

The company was, however, facing an additional challenge in the Tanzania market due to an increase in excise duty, he added.

EABL shares, which rose by 80 percent over the last 12 months on the back of strong foreign investor demand, were down 4 percent at 295 shillings after the results.

It declared an interim dividend of 1.50 shillings per share, down from 2.50 shillings a year ago. ($1=87.3500 Kenyan shillings) (Reporting by Duncan Miriri; Writing by Richard Lough; Editing by Greg Mahlich)

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