Covid-19 gulps EABL profits down by all of $28.7m

Beer maker East African Breweries Ltd (EABL) has taken a hard hit from the closure of bars and restaurants in the wake of the Covid-19 pandemic, becoming the first listed company in the region to issue a profit warning.

The profit alert means that EABL’s net earnings will fall at least 25 per cent, or by Ksh2.87 billion ($28.7 million) in the financial year ending June 2020.

More companies are expected to issue similar profit warnings as effects of the widespread economic shutdowns become apparent.

Kenya, Uganda and Rwanda have enforced the strictest lockdowns within the East African Community (EAC) countries to curb spread of the coronavirus, while South Sudan, Tanzania and Burundi have also issued public health advisories that have had varied adverse impact on economic activity.  

“We are not surprised with this profit warning and you realise that it is not going to be EABL alone,” said Paul Mwai, chief executive of AIB Capital, a Nairobi-based stockbrokerage and corporate finance advisory firm.

“It will not be a surprise to see more companies in manufacturing, hotel and hospitality sectors issuing profit warnings.”

EABL, which is listed on the Nairobi Securities Exchange (NSE) and cross-listed on the Dar es Salaam Stock Exchange (DSE) and the Uganda Securities Exchange (USE) where it also has processing plants, reported an after tax profit of Ksh11.51 billion ($115.1 million) last year.

The management now says measures put in place to contain the deadly pandemic will see net earnings fall sharply to about Ksh8.64 billion ($86.4 million).

The projected profit will, however, still surpass the 2018 net earnings of Ksh7.25 billion ($72.5 million).

Regional governments were quick to enforce social distancing regulations and order shutting down of bars, restaurants, hotels and other entertainments spots that are key sales points for the giant brewer after initial cases of the respiratory infection were reported in the region in March.

Drinkers have not been spared either, the pandemic has eroded their incomes through job losses, pay cuts and closure of businesses, leaving them with little or no disposable cash to buy alcohol, further dampening EABL’s earnings prospects.

EABL’s net revenue increased by 12 per cent last year to Ksh82.5 billion enabling the giant brewer to pay its shareholders a total dividend of Ksh8.50 per share.

Prior to the Covid-19 pandemic the brewer’s biggest headache was stringent government regulations on the consumption of alcohol across the region.

“The Covid-19 global pandemic and the subsequent response measures taken across the region have impacted our business negatively,” said the group’s chairman, Martin Oduor-Otieno, in a press statement.

“Consequently the board of directors of the company hereby informs its shareholders and the general public that EABL’s current performance forecast indicates a decline in profit after tax of approximately 25 per cent for the financial year ending June 30 versus prior year.”

The firm, which sells brands such as Tusker, Serengeti, and Ugandan Waragi among many others including spirits, says it has deployed a raft of measures to minimise the impact of the pandemic on its business.

Efforts by The EastAfrican to get comments on the kind of intervention the company is taking to cushion were unsuccessful as the management declined to give further details.

During the six months’ period to December 31 2019, EABL’s net profit increased nine per cent to Ksh7.2 billion ($72 million) from Ksh6.6 billion ($66 million) in the same period in 2018, with net sales in Tanzania growing 19 per cent compared with 10 per cent and eight per cent in Uganda and Kenya respectively.

In Kenya, EABL is worried that the consistent increase in excise tax by the government is having a negative impact on its business, particularly bottled beer brands, which posted a one per cent decline in sales.

The Kenyan government has increased excise taxes on beer and spirits to 5.2 percent and 15 per cent respectively, making these drinks out of reach for many consumers.

In the Uganda market, a decision by the government to ban sale of spirits in sachets impacted growth particularly of spirits, which posted a flat growth of one per cent although beer sales increased by 15 per cent.

EABL is majority-owned by the British Diageo (50.03 percent), through Diageo Kenya Ltd (42.82 per cent), Diageo Holdings Netherlands BV (4.60 per cent), and Guinness Overseas Limited (2.61 per cent).

Several firms have started rethinking their decisions to return funds to shareholders in the form of dividends amid the Covid-19 pandemic which demands strong capital buffers to withstand financial shocks.

The pandemic has deepened pressure on shareholder dividends, with firms deciding to hold on to their cash reserves to sail through the lockdown.

In the banking industry, regional and global central banks have advised lenders to reduce or cancel dividend payouts altogether, until the existing volatile situation stabilizes.

The Bank of Uganda (BoU) has suspended bonus and dividend payments as it seeks to reserve capital to support the economy.

Globally, the European Central Bank (ECB) has asked banks in the region not pay out dividends to shareholders until at least October 2020 to boost the lenders’   capacity to absorb losses and support lending to households, small businesses and corporates during the coronavirus (Covid-19) pandemic.

In Kenya, NCBA bank became the first lender to overturn an earlier proposal to issue dividends totalling Ksh2.24 billion ($22.4 million), replacing it with a bonus issue of one for every 10 held.

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REVENUE HOLES

EABL has been seeking to plug revenue holes punched by tight regulations and increased taxes in Kenya and Ugandan markets, where the respective governments have been seeking to regulate consumption of alcohol.

The company announced in March that it will spend at least $18.7 million on the purchase of an extra stake in Serengeti Breweries, signalling the firm’s faith in the Tanzanian market. The firm last year completed the purchase of an additional four per cent of the share capital of SBL for $3 million.