UPDATE 2-New beer tax curbs East African Breweries profit growth

Fri Feb 14, 2014 7:53am EST

* H1 pretax rises to 6.08 bln shillings

* Revenue up 4 percent at 31.86 billion

* Tax, slowdown in Tanzania to curb earnings growth

* Posts growth in sales of premium brands

* Shares down 1.6 pct (Recasts with Senator Keg, adds outlook, shares, analyst)

By Duncan Miriri

NAIROBI, Feb 14 (Reuters) - East African Breweries Ltd (EABL) said a duty imposed on its low-end Senator Keg beer in Kenya had slashed sales volume of the brand, warning the downturn in one of its top-selling products would help curb profit growth this year.

The new tax imposed on Senator Keg, previously exempt from excise duties, hiked its price 60 percent to 40 shillings and cut sales 85 percent in the six months through December, forcing EABL to come up with a response, such as the launch of new bottled beer for the low-end of the market.

"We have got some work to do to mitigate the effects of that (excise tax)," Chief Executive Charles Ireland told a news conference after EABL reported a 5 percent increase in first-half pretax profit to 6.08 billion shillings ($70.5 million).

Analysts said the duty on Senator Keg, imposed by the government to shore up its revenues, illustrated how firms looking to ride the consumer boom in Africa need to be nimble enough to respond to changing regulatory environments and other factors.

"We should not forget that these markets have challenges ... it is not like the African consumer is just sitting there waiting to consume your products," said Eric Musau, an analyst at Standard Investment Bank.

EABL, controlled by Britain's Diageo Plc, said it expected to post single-digit revenue and profit growth in its financial year through June, curbed by distribution issues in Tanzania as well as the new taxes in its home market.

"We expect our revenue and profitability to grow marginally," Ireland told a news conference.

The brewer said first-half revenue grew 4 percent to 31.86 billion while earnings per share rose to 4.99 shillings from 4.75 shillings a year before. It plans to pay an unchanged interim dividend of 1.50 shillings per share.

KEY PRODUCT

EABL does not say how much of its profits come from specific brands, but Senator Keg, sold in distinctive glass cups or mugs as opposed to bottles or cans, was a key product in a market where a huge segment of the population cannot afford more expensive beers.

Elsewhere, EABL posted single- to triple-digit growth in sales across most of its products, which range from Tusker beer to Johnny Walker whisky.

Sales of premium beers and spirits were helped by consumers getting more affluent in the midst of robust economic expansion in the region, Ireland said.

Uganda, which suffered from sluggish sales in previous years, rebounded during the period, contributing to the 4 percent rise in sales. But in Tanzania sales dropped by 11 percent, mainly due to the firm shifting to a new, dedicated distribution network, to cut reliance on independent wholesalers.

SABMiller's Tanzania Breweries enjoys a huge lead in east Africa's second-largest economy, controlling 70 percent of the market. EABL hopes to chip away at its rival's advantage with the new distributor network.

"In Tanzania, the work we are doing is a future game," Ireland said, adding he expected the business to start growing in the next financial year.

EABL shares fell 1.6 percent to 245 shillings.

Musau at Standard Investment Bank saw a "fair value" on the stock at 198 shillings. Many large African stocks have Benefited in the past year from foreign investors seeking to tap into the impressive growth rates across much of the continent.

"From a strategy perspective they seem to be doing the right things but we are slightly concerned by the share price," Musau said.

($1 = 86.3000 Kenyan shillings) (Editing by Drazen Jorgic and David Holmes)

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