We recommend a LONG TERM BUY on EABL. The counter is trading at KES 181.00 at a P/E multiple of 35.0x, with a dividend yield of 1.7% and ROE of 46.6% as at 2nd July 2021. We recommend investors with a long term view to take buying positions in the counter.
Given the business trajectory over the years and the group’s agile adaptability to the current challenging operating environment, we are confident in the group’s robust business strategy to return to strong growth in the medium term. We therefore expect a bounce back in performance, albeit gradually, towards pre-Covid levels. We remain confident in performance going forward given improved performance in 1H2021 compared to 2H2020 (following the ease of restrictions). Comparing the two periods:
- Volume grew by 45.0%
- Gross sales grew by 52.0% to KES 78.2 billion
- Gross profit grew by 73.0% to KES 19.3 billion
- Profit after tax grew by 55.5% to KES 3.8 billion
- Changing business model – In line with economic and consumer shifts, the group managed to shift its business model, adapting to e-commerce channels and growth in the off-trade business (increased product portfolio in supermarkets and retail outlets). We expect the company to continue delivering insight driven innovations to capture evolving consumer preferences.
- In particular, we expect continued sustainable growth in the spirits category, particularly the premium segment. Spirits have consistently outperformed beers over the years, registering double digit growth (12.0% growth y/y in 1H2021)
- The group expects continued growth in mainstream beer across East Africa given continued investment — expected capacity expansion CAPEX of KES 1.6 billion.
- Operational efficiencies – We expect the group to continue reaping the benefits of its productivity and sustainability initiatives, cushioning the bottom line. This includes investments in renewable energy to improve production processes in water, energy and waste management. Additionally, in light of Covid-19, EABL has managed to optimize its selling and distribution costs (selling costs and administrative expenses declined by 43.0% and 6.0% y/y as at 1H2021).
- Sustained growth in Tanzania – Tanzania presents opportunity for growth in both the short and long term driven by the Serengeti brand (double digit growth the past 3 years — +21.0% in FY2019, +19.0% in FY2020 and 16.0% in 1H2021.
- Portfolio diversification – The diversified product portfolio has insulated the firm from excessive losses during periods of uncertainty. Going forward, management expects premium brands and mainstream beers to drive growth. In particular, the group expects innovation around their gin portfolio (across different price points), that has gained traction the past 2 years.
- Strong parent company – Leveraging on Diageo’s financial support and in particular the recovery fund to support pubs and bars post lockdown, we expect a quicker turnaround for the firm.
- With the new Covid-19 measures in place that have resulted in cessation of movement and closure of bars and restaurants in high risk zones country-wide, we expect depressed sales volumes in 2H2020 particularly in the on-trade business that remains the core revenue driver.
- We expect the pandemic’s aftermath to have short term risk particularly on consumer purchasing power that has led to down trading of product portfolio consumption.
- Foreign currency fluctuations remain a risk given the group’s operations across the East African region exacerbated by the Shilling depreciation, resulting in translational losses.