Investment Recommendation Report: EABL

We place a HOLD recommendation on EABL. The company is the largest branded alcohol beverage business within East Africa. Furthermore, the company is 50.03% owned by Diageo – a multinational alcoholic beverage company.  We expect EABL to focus on sustaining the growth momentum of spirits and value beer, through capacity investments. The company has been redirecting its focus towards the spirits and value beer categories as opposed to the mainstream and premium beer categories due to declining beer sales occasioned by evolving consumer trends and higher excise taxes.  The company is constructing a KES 14.0 billion brewery in Kisumu – which will initially produce Senator Keg (value beer). This brewery is expected to commence operations in July 2019.  Moreover, the company has completed the construction of a new spirits line at its headquarters in Ruaraka at a cost of KES 600.0 million, in order to meet the rising demand for spirits (being driven by a growing middle class with higher disposable income). However, we note with concern on the implementation of the Excise Act that gives the Treasury and the Kenya Revenue Authority the power to implement inflation-based tax increases. This may hamper demand through higher retail prices. EABL has an attractive ROaE of 82.8% with a modest dividend yield of 4.2%.  The company is trading at a P/E ratio of 18.10x, (at a price of KES 204.00) as at 2nd August 2019.