East African Breweries Limited on 15th May issued a profit warning indicating that its net profit for the year ending in June 2020 is expected to fall by approximately 25%. The COVID19 pandemic has negatively impacted sales for the top brewer in East Africa leading to the downward revision of its earnings forecast.
Following the profit warning, Citi research has downgraded EABL’s sales revenue forecast and Earnings per Share forecast for the year ending in June. The analysts predict that EABL’s net profit in 2020 will drop by 26 per cent to KSh8.5 billion from KSh11.5 billion recorded in June 2019.
Due to the closure of bars and the night-time curfew in Kenya, Citi analysts expect EABL to suffer a 36 per cent dip in sales in the second half of 2020. The company’s annual sales are estimated to decline by 13 per cent.
The decline in sales is expected to persist up to 2021. “Looking ahead, we expect the impact of COVID-19 to continue to weigh on the group through calendar Q3 2020 and we forecast H1 2021 sales -17%,” read the report by Citi research.
Citi analysts maintain a buy recommendation on EABL shares. Nonetheless, they have revised their 12 months Target price to KSh 195 from KSh250. The company’s shares closed the day at KSh 161.25 on Thursday 21st May 2020.
Risks which may prevent EABL from reaching its target price include; higher excise taxes which may adversely impact demand, intense competition, currency risk as the US dollar continues to strengthen, balance sheet risk due to the increased debt levels, and liquidity risk whereby investors face low trading volumes of the share.
Upside risks as noted by Citi research are; higher than expected growth, a sharp drop in interest rates, and excise tax cuts which would lead to higher sales.
EABL is the largest brewery in East Africa and holds the largest market share in Kenya and Uganda, and holds second place in Tanzania. It is 50% owned by UK-based alcohol giant Diageo. The company manufactures a variety of beer brands and spirits including Serengeti Lite, Tusker Cider, Captain Morgan Gold, Chrome Vodka, and Uganda Waragi Pineapple.
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