Category Archives: EABL

Shares Portfolio February 2011

A tale of Two Brewers – comparing shares to November 2010 and a year ago

The Stable

Bralirwa (Rwanda) ↑
Diamond Trust Bank ↑
East African Breweries (EABL)
Kenya Airways ↓
Kenya Commercial Bank (KCB) ↑
Kenya Oil Company (Kenol) ↓
Safaricom ↓
Scangroup ↓
Stanbic (Uganda) ↑
Uchumi ↔

Review:
– Best performer: Bralirwa up 31% since their 2010 IPO
– Worst performer: Scangroup (down 14%), then EABL
– In: Bralirwa
– Out: None
– Increase None
– Decrease: None
– Unexpected gains/losses: – Uchumi shares have not been re-listed despite the company’s exit from receivership a year ago

Events & Outlook: – Performance: The Portfolio is down 3% in the last three months while the NSE Index is down 6%
-Bralirwa Rwanda was a good buy as the Rwanda (virtual monopoly) beer company listed shares that were open to all East African nationals and many retail shareholders got full allocation (still waiting for a similar offer from Tanzania); However in Kenya EABL faces challenges from the so-called Mututho Law which appears to have curtailed sales of alcohol through reduced hours.
– Safaricom seem to be weathering the storm from Airtel Kenya and their battle has extended to political and regulatory circles. Airtel added only 2 million more customers in all Africa compared to a year ago (Dec ’09)
– Kenol has gone quiet since the Kenya Government instituted price controls around the country and despite popular expectations, prices have steadily risen in the two months since the program started.

Looking forward to: – February brought news that Transcentury and Britak – British American insurance plan to list at the stock exchange this year. Britak, Kenya’s 4th largest insurance company looks more likely – it had a 2009 pre-tax profit of Kshs 500 million and assets of 15 billion ($185 million). Transcentury shares trade at an OTC market run by Dyer & Blair – and (this week) are at Kshs 35 per share compared to Kshs 48 in 2010 according to the East African.

CIC Insurance, CFC Life and Family Bank are silent, while government linked companies like New KCC, Consolidated Bank, and National bank, are also likely to go through more political hoops before they reach the market.

– Also on offer this month is a 30 year savings bond from the Central Bank of Kenya to promote savings in the country. It pays 12% per year and targets to raise Kshs 18 billion ($221 million) with a minimum investment of Kshs 50,000 ($615), and closes on. Exactly two years ago, there was a similar push for an infrastructure bond offered by the Kenya Government to raise 18.5 billion ($231 million) by offering investors 12.5% returns over 12 years.

Alcohol Law in Kenya

Kenya’s alcoholic drinks control act is the talk of the country

The new law which restricts the sale of alcohol, bar opening and closing times, prescribes penalties on offering brewers, sellers, patrons etc. is temporarily on hold after an association of bar owners from Muranga in Central Kenya filed a court case to delay its implementation. But in a rejoinder, another group of leaders from Muranga County (see website) have come out and supported the bill via a full-page colour advert in the newspapers. They claim alcohol has ravaged the county leading to death, blindness, family break-ups, but most important the waste of able-bodied youth and men who would otherwise be engaged in productive agri-business (coffee, tea, milk, horticulture).

More on the positive side of the alcohol ban can be found in a separate newspaper article in the Saturday Nation which showed the dramatic effects the ban had on a small village in Gatanga (Central Kenya), and the scenes were probably mirrored in many other rural villages that have (previously) seen similar effects on alcohol abuse on productive population.

….although it is noon, the young folks are sober, a state locals say is a miracle. “By noon, half of them would be drunk,” says Mr Michael Muthee, 45, a carpenter. He should know: Although offering to pay Sh300 a day for a helping hand in his workshop, he found it hard to find a sober young man before the new alcohol laws came into force. And when he did, the fellow could not be counted on to return the next day, least of all, sober.

…Before the new laws came into effect, he says, much of the work on the coffee farms was left to women and children, The male folk would vanish in morning and stagger home in the evening.

So what’s in the bill being championed by the National Campaign Against Drug Abuse Authority (NACADA), but which a Member of Parliament John Mututho took most of the credit and now some blame for hurriedly pushing through?

– NACADA which operates under the Office of the President, and not from either Ministry of Health (why there are two Health Ministries and two education Ministries in Kenya is another story) sought to tackle the increased availability of outlets selling alcohol, and the marketing of it to (and use by) youth (under 18’s).

Enforcement: NACADA is meant to educate Kenyans on the dangers of alcoholism. But so far there has been little education (clause 69), and the agency which is to give statistics on alcohol which they collect state (at their website) that 15% of 15-64 years-old’s in Kenya take illicit brews.
– Changaa Legal: Kenya’s most popular illicit brew is going to be legalized (repeals changaa prohibition act (69). The Government is going to develop standards for changaa which is to be brewed and packaged in a manner similar to Uganda’s Waragi and Tanzania’s konyagi, and sold in glass bottles larger than 250ML.
Fund: There is now an alcoholic drinks control fund supported brewer, wholesale & retail licenses – and of money raised, not more than 15% will go to civil society groups and not more than 50% to the district alcohol committee (led by district commissioner)
– Being drunk in public can attract a fine of Kshs 500 ($6) or 3 months in jail (a mismatch? – @archermisahle says cops are asking 1,000 for people who stagger out of pubs)
– Restricts police harassment: Only senior police officers can conduct inspections, not the loitering patrol cops (25)
– Special Ones: There is some elitism at play, and places exempt from the Act (7) include national assembly (parliament), clubs (i.e. sports, social), military & institute canteens. A separate newspaper notice extended some exemption to hotels (tourists/guest) and restaurants (patrons who eat) but these are not spelt in the act.

Promotion Landscape Changes: Kenya’s popular music reality shows contest – Tusker Project Fame would be no more unless it can be rebranded as something else (Alvaro Project Fame perhaps?)
– Bottle top lotteries (check under your bottle cap & win) are banned (47) as no promotion can be run that encourage alcohol consumption

– Also while EABL’s Tusker brand has bailed on the world famous Safari Sevens rugby tournament (now known as the Safaricom Sevens), alcohol can’t be sold at the event which also features schools rugby competition (46) – will the organizers exclude schools and any spectators under 18 from the tournament?

Reading the Bralirwa Tea Leaves

Brasseries et Limonaderies du Rwanda Limited – (Bralirwa) is Rwanda leading beer brewer and which is now offering shares to the public in an IPO. In the spirit of the East African Community, the shares are offered to residents of all member countries (Read that Tanzania).

In the past, cross-border opportunities have been in the case of Safaricom (Kenya) and Stanbic (Uganda) IPO’s as well as with cross-listing of a half-dozen Kenyan companies across the exchanges of Kenya, Uganda, Tanzania and soon Rwanda.

from reading the information memorandum (IM)

On Offer: – 25% of company is for sale; being 128.57 million shares at 136 RwF per share (~Kshs 18) and minimum shares are 100, with units of 100 thereafter
– IPO allocation will be 35% retail (Rwanda and EAC nationals), , 5% employees & distributors, 30% international investors, and 15% to Qualified Institutions (insurance, pensions firms) in Rwanda and in EAC – if oversubscribed Rwanda nationals will get 60% in retail pool
– Runs from 23 November to 17 December and trading begins in February 2011

About Bralirwa: – Current shareholders are the Heineken group with 75% and state of Rwanda with 25%; the shares were split by 5000:1 ratio in November 2010 to facilitate this IPO
– The IPO represents a complete divestment by Rwanda government
-Heineken, the no. 2 brewer in Africa controls the group.
– The company is largest taxpayer in Rwanda – accounting for 12% of domestic tax revenue
– Sales in 2009 were $60 million and with a net profit of $11 million
– Subsidiaries include Coglegas (62% of company exploiting methane in Lake Kivu) and Bramin (50% of a maize processing company)
– Bank borrowing is a fixed interest rate of 12.25% and Bralirwa has unsecured borrowing facilities from Bank of Kigali, Commercial Bank of Rwanda, Fina Bank, Kenya Commercial Bank and Access Bank which have a combined facility limit of Rwf 3.5 billion ($5.8 million)
– Staff benefits for 528 (45) staff listed in IPO include performance-based bonus scheme insurance scheme, subsidized mortgages vehicle leases, medical treatment (free of charge), uniforms for school going kids of employees, school fees for orphans of staff killed in 194 and drinks for employees at special occasions
– The company’s supply chain is via the port of Mombasa for clearing and transportation of inputs, and a 1000 KM along the northern corridor through Uganda which takes 3-4 weeks and they use SDV Transami
– Regional competitors – EABL Kenya (Central Glass) and KIOO Tanzania – provide the company with bottles
– Competitive strengths include the fact that importing beer from Kenya or Uganda is uncompetitive owing to freight, fuel and insurance costs however high energy costs of US cents 22/kkwh are a challenge.

Incentives: – While effective income tax in the country is 32% in 2011, it can drop to 8% (over 5 years) for companies that sell over 20% of their shares to the public
– 2009 divided was 5.1 billion RwF ($8.5 million) or approximately RwF 50 per share (Kshs 6.5)
– No capital gains tax
– Withholding tax is 5% for Rwanda and EAC residents (but elsewhere IM says all dividend subject to 15% withholding)

Market: – Bralirwa market share in Rwanda in 2010 is 94%
– Rwanda has a Population of 10.5 million people, but per capita beer consumption of 9 litres trails Kenya (11 litres) and Burundi (18 litres!!)

Kenya Links: Bralirwa will be Rwanda’s first listed company, joining Kenya’s KCB, which is the only equity, trading on the Rwanda Stock Exchange. Kenyan influence is strong in the form of KCB (collecting agents), Dyer & Blair (transaction advisors), Faida Securities, Renaissance Capital, Muriu Mungai advocates (legal advisors), and the Central Depository & Settlement Corporation – CDSC (registrars). However Kenyan investors may be currently pre-occupied with their own KPLC rights issue and Deacons private placement

Governance & Registry: – Votes at annual general meeting shall by poll and articles explicitly state not by show of hands
– Company may buy its own shares
– All directors signed the IM document
– IM declares none of the directors are involved in bankruptcy proceedings or been convicted under criminal proceedings or been judged by a court to have been fraudulent or dishonest (Ethics Kenyan corporates can learn )
– Articles also state – if a shareholder dies, their survivor, executor and administrators only persons recognized to have an interest in the shares

EABL & Serengeti

East African Breweries is seeking shareholder endorsement of their decision to purchase 51% of Serengeti Breweries of Tanzania. They have sent out a shareholder circular produced by Merrill in London that outlines the nature of their investment.

(Image from Eyes4Mwanza.blogspot.com)

Partnership: Serengeti will distribute EABL brands exclusively in Tanzania (except duty-free shops). Also Serengeti will brew EABL beers but this has not yet started.

  • EABL will distribute Serengeti products worldwide (they include Premium Serengeti Lager (PSL), The Kick and Uhuru Peak beers, as well as the non-alcoholic Vitamalt Plus.
  • The deal is contingent on EABL selling its 20% stake in Tanzania Breweries (presumably to Tanzanians), not closing any Serengeti plants while continuing to produce certain Serengeti beer brands for the next five years. (SABMiller still have a 20% stake in Kenya Breweries)

Payment: The EABL Board estimates that it will make a cash payment of US$61 million (equivalent to Kshs 4.95 billion) to acquire its 51% stake using reserves or bank facilities (no recourse to shareholders). They will retain $10 million to deal with any shortcomings or deviations in concluding the deal.

  • Diageo (EABL’s largest shareholder) has the option to, in four years, purchase the remaining stake 49% in Serengeti (not held by EABL) for not more than $600 million. The price is higher but the reasoning is that EABL is investing at an early stage while Diageo will be investing at a later stage when capacity and synergy gains will have been achieved at Serengeti.

Partner: Serengeti is the second-largest brewer in the country with a 15% share behind Tanzania breweries (EABL’s previous partner) who have a 72% share of the branded brew market. However unbranded beers command a significant majority of the alcohol consumed in Tanzania – and these include fermented drinks and local beers like Kimpumu (millet beer, is that Tz busaa?), cassava beer, Tekawima (maize beer, is that Tz changaa?) which are highly popular. Serengeti has plants in Dar es Salaam and Mwanza and is developing one in Moshi.

  • Serengeti‘s balance sheet has assets of about Kshs 4.4 billion (compared to EABL’s Kshs 38 billion). Their accounts summarized in the circular show drastic changes when produced under Tanzania GAAP generally accepted accounting principles) and international financial reporting standards (IFRS) mainly from changes to the treatment of bottles and crates (& their deprecation), and revaluation on land & buildings resulting in larger assets and smaller profits under IFRS compared to Tz GAAP.
  • Current shareholders of Serengeti are Union Brewery Holdings, Negus Holdings (exiting), Napster group, and V. Mehta (exiting), CMG investment, Mark Bomani and Henry Mosha.

Urban Inflation Index June 2010

Tracking changes from three months ago Mar’ 10 and one year ago – Jun’ 09

The World Cup is on going in South Africa and helpful guides for price comparison have been provided for comparison. Also the Kenya budget speech for 2010-2011 was read by Uhuru Kenyatta the Finance Minister and has been trumpeted as a trillion shilling budget despite a deficit of resources.

In reaction to some changes noted here, Kenya’s Parliament on June passed a price control bill that seeks to regulate the retail price of among other things – maize flour, sugar, rice, wheat flour, kerosene, diesel, petrol, and cooking fat.

Gotten Cheaper
Staple Food: Maize flour, which is used to make Ugali that is eaten by a majority of Kenyans daily. A 2 kg. Unga pack at Uchumi today costs Kshs. 71, which is 15% cheaper than Kshs 84 in March and 92 a year ago [a 2.5kg pack in South Africa is ~kshs. 111]

About the same
Communications: priceshave remained about the same despite it being an eventful few weeks;
– Safaricom had another exemplary year of profits and performance – returning a turnover of $1.05 billion (Kshs 84 billion) and will pay their shareholders dividend of $100 million (Kshs 8 billion). They are the exception in the sector where their rivals loss making – Zain (Africa) was acquired by Bharti Airtel and will undergo its fourth brand change in eight years, while Orange averted a messy divorce with the Kenya Government by way of a sweetheart deal that may shake up the sector. They and newcomer Yu will all benefit from a government decision to lower the cost of a 3G communications license from $25 million to $10 million.
– Communications costs remain about the same for voice and SMS (who can keep up with Yu and Zain’s promotions) and the big push has been in the area of data. Safaricom latest push is for 10MB for 8 shillings ($0.10) and continues a recent trend that pushes down the cost of data with cheaper phones (Nokia E63 is now 15,000 (about $187 down) from 23,500 a year ago) and hardware, financing (Loans for laptops).
– Unfortunately Safaricom has rubbed some local developers the wrong way entering into a Mxit partnership and again with an innovation forum that has caused some controversy.

Utilities – Electricity: Latest bill is Kshs 1450 ($18) which is down from 1,700 (~$22) in March and about the same as 1,550 a year ago. Heavy rains at the end of the last quarter have seen Kenya dams fill and a power generation shift from diesel back to hydro – the Government says this will result in reduced power bills at the end of the year, but the rains have slackened of late. In the bill, consumption is kshs 500 with a fuel levy cost of 400, while a year ago consumption was also 600 with fuel levy cost of 500

Other food item: Sugar (2 kg. Mumias pack) is at 200, and no change in the last few month. COMESA liberalization is set to happen in 2011, and is expected to expose the market to unrestricted imports from the region, bring down the retail price of sugar in urban areas, but leaving sugar farmers from western Kenya with high input costs at a disadvantage. The middlemen men still run this sector and around the period of Uhuru’s budget speech was being read, there was no sugar (from any company) on the shelves at Uchumi. [2.5kg in SA is Kshs 191].

More Expensive
Beer/Entertainment: A bottle of Tusker beer (at local pub) is Kshs. 160 ($2) most up from 150 in March at most places I know and 130 from a year ago. There was an immediate price hike effected by dominant brewer East African Breweries (EABL) when the Minister read his speech in early June; however some bar owners complain that this should have computed at 5 shillings per bottle (beer retails in ½ litre), but EABL passed on an additional 5 shilling increase to customers under cover of the tax hike. The price of coca cola has also gone up as the excise tax on carbonated soft drinks, wines and spirits was also pushed up 8%.

Fuel: A Litre of petrol fuel (at local petrol station) is now Kshs 90.9 per litre (~$5.1 per gallon) , 7% up compared to Kshs 84.9 in March and 25% higher than it was (72.5) in June 2009.

Foreign Exchange: 1 US$ equals Kshs 80.6 compared to Kshs. 76.6 in March and 77.94 a year ago as the Kenya government has indicated that it will not (can it afford to) intervene to support the shillings from sliding.