EABL to borrow Sh15b from banks to build Kisumu plant

**EABL group managing director Andrew Cowan and firms chairman Charles Muchene during the release of financial resuts on Friday. (Photo: Wilberforce Okwiri/Standard)**

East African Breweries Limited (EABL) will borrow the Sh15 billion it needs to build its new brewery in Kisumu.

The brewer said on Friday it will not be turning to its shareholders to fund the project through equity after it received an approval from the board to borrow. But it expects to reduce the amount of money it will borrow by supplementing it with internally generated funds.

“We are talking to local banks with an international footprint to provide the debt. We expect to invest the money in a span of two to two and a half years,” EABL Finance Director Gyorgy Geiszl told journalists on Friday after he announced 2017 financial results of the firm.

But the firm did not reveal the identities of the banks it is talking to only saying the financing deal should be finalised in coming months. The plant, which is one of the biggest investments in the manufacturing industry in the last three years, is expected to create additional demand for sorghum in the western Kenya region. EABL expects to sign up 15,000 new farmers to bring its total number of farmers on contract to 45,000.

It is projected that the plant will push sorghum demand from the current 20,000 metric tonnes to around 40,000 in the next five years. The Government expects the plant to help generate an additional 110,000 jobs indirectly. EABL projects that about 9,000 new bars will be opened due to the plant.

The new borrowing could increase their financing costs at a time when the firm, majority owned by British beer conglomerate Diageo, has been reducing its debt. Its net borrowing for the year ending June 2017 stood at Sh24.4 billion, a 5 per cent drop from the Sh25.6 billion it borrowed in a similar period in 2016.

The firm has been borrowing to fund its capital expenditure over the years. The firm says it has been investing an average of Sh5 billion. It said net profit from continuing operations increased by 6 per cent to Sh8.5 billion in the year ended June 30, boosted by a slight increase in volumes. However, its net profit dropped from Sh10.2 billion to Sh8.5 billion after removing a one off gain it made last year for disposing an asset.

The firm’s chairman Charles Muchene said its business demonstrated resilience despite a challenging operating environment characterised by inflationary and regulatory pressures. It recorded a 9 per cent jump in revenue to Sh70.2 billion in the year.

Kenya continued to be the biggest contributor to its business, accounting for 75 per cent of its revenues. Uganda slightly shrunk to 16 per cent from the 18 per cent last year.

The firm said Tanzania was the worst hit, dropping by 13 per cent in volumes to account for only 11 per cent of its business for the year. This is the second year in a row that Tanzania has registered a decline in its revenue contribution to the group. This is after the country imposed a ban on sachets.

“Export markets reduced considerably especially South Sudan and Burundi,” Mr Muchene said. The firm has presence in seven markets. The company said it has since paid for the fine imposed after proceedings of the Fair Competition Commission but declined to reveal how much it paid in settlement. It said the money had been provided for in the 2016 financial year.

The commission had accused EABL of breaching merger agreement rules, and not ensuring improved performance at Serengeti Breweries Ltd (SBL).

It continued to struggle to grow its beer brands in the local market, most of which reported flat or negative growth. Tusker, its flagship beer, combined with its other mainstream beers, recorded flat growth in sales.

But the firm says it has started reaping the benefits of innovation after it introduced new products in the market. “Innovation contribution went up by 15 per cent compared to last year, adding Sh19 billion to the total revenue across East Africa,” it said. Key innovations included Tusker Cider, Pilsner 7, Smirnoff Electric Ginseng in Kenya, Ngule in Uganda and Serengeti Light in Tanzania.

EABL has recommended a final dividend of Sh5.5 per share, bringing the total dividend payout for the year to Sh7.5 per share. This is the same amount it paid in the previous year.

“Net sales performance was mainly driven by Kenya which had good performance in mainstream spirits and value beer. However, this was impacted by weak bottled beer sales driven by excise tax increases, making EABL products less affordable,” the firm said in a statement. “Drought related inflationary pressure impacted consumers’ disposable incomes,” Muchene said.