By Citi Bank Analyst Andrew Howell
News last week that East African Breweries EABL will build a new brewery in Kisumu, Kenya, was interesting, not so much for the substance of the announcement (we knew EABL was running low on capacity in Kenya, and the brewery size came inline with the “small, specialized brewery” option that we had previously discussed) but for the way it was made. This was not some press release posted on an obscure corporate website, but a televised announcement made by the President of Kenya, heralding 110,000 new jobs in Kisumu and neighboring Nyanza counties from this investment. And while such a forecast might seem hyperbolic, no one should be surprised: this pre-election season in Kenya, a time of generous pledges.
What is interesting here is that prevailing political forces seem to have aligned themselves with a key listed stock in Kenya, at least for now. Such a “presidential” capex announcement suggests that the beneficial tax treatment for Senator, a key underpin of demand growth in EABL’s value segment, is unlikely to be revoked under a Kenyatta administration. This bodes well for continued revenue growth at Buy-rated EABL, even if Senator’s margins are somewhat lower than mainstream Tusker’s.
EABL has not disclosed the planned capacity of the Kisumu brewery. Management has previously stated that a new brewery in Africa can cost from $100-150 per HL of capacity, suggesting a capacity in Kisumu of 1-1.5m HL, which would represent a 15-20% capacity increase in EABL’s Kenyan capacity. However, a dedicated sorghum brewery might be cheaper per HL than a traditional malt brewery, which could result in somewhat higher capacity.
By Citi Bank Frontier Markets Analyst Andrew Howell CFA