East African Breweries Limited

East African Breweries Limited Email: researchke@securitiesafrica.com Tel: +254 735 571 530 Sector/Country: Beverages/ Kenya Stock Rating: Buy Equity Market Cap : Current Share Price : Target Price : 12 Mth Trading Range: Daily Avg Volume : USD 1,727.4m KES 225 KES 265 215-306 282,882 1H17 Results: In-line with expectations, outlook stable EABL released a satisfactory set of results taking into account the difficult operating environment. Turnover fell by 6.3% to KES 35.16bn (1H16: KES 37.51bn) in-line with the company s guidance. On a positive note, gross margins improved by 70bps to 47.2% (1H16: 46.5%) as the Group continued to drive cost improvements through the increased use of locally produced inputs and effective hedging strategies. Other cost efficiencies also paid off in lower selling and distribution costs, down 17.95% to KES 2.7bn (1H16: KES 3.2bn) and administrative expenses down 9.36% to KES 4.6bn (1H16: KES 5.1bn) which resulted in an improvement in EBIT margins of 180bps to 26.5% from 24.7% in 1H16. EBIT increased to KES 9.32bn (1H16: KES 9.28bn). EPS from continued operations fell by 0.26% to KES 6.28 (1H16: KES 6.30). An interim dividend of KES 2.00 was declared (1H16 KES 2.00). Kenyan excise duties impact top-line The Kenya Revenue Authority s (KRA) increase in excise duties on beer and spirits came into effect on 1 st December 2015 and it has had a large impact on the Group s top-line. Excise on spirits increased from KES 120 per litre to KES 150 per litre, while the increase on beer was from KES 70 per litre to KES 100 per litre. However, the recommended retail price was only increased by KES 20, thereby eroding revenue to EABL. Interestingly, Management noted that their tracking shows that some retailers have in fact increased prices by as much as KES 30-40 per bottle. The increase in duty has brought about a shift in consumer dynamics, with consumers shifting from the mainstream beer segment (net sales down 13% y/y) into the more affordable emerging beer segment (net sales up 10% y/y), e.g. Senator, and the mainstream spirits segment (net sales up 31% y/y). On a side note: December was the first month of like-for-like sales following the increase in duties and Management noted that bottled beer sales volumes were up 1%. The change in consumer preferences has prompted EABL to embark on capacity expansion on both the Senator Keg line and the spirits line. We should have further clarity on the degree of the expansion over the next 6 months. Management has however noted that Capex spend for the FY17 should be in line with the previous years, ca. KES 5-6bn. Uganda continues to perform well Uganda continues to perform well thanks to efficient logistics management and the introduction of Ngule in the emerging beer segment while Tusker Lite net sales grew by double digits. Net sales increased by 7% in local currency as well as in KES as the currencies more or less track each other. Management noted that the Group is running into capacity constraints in Uganda, in particular with respect to the spirits packaging capabilities. A slight concern is the need to move away from sachet packaging as a result of ongoing lobbying against the sale of alcohol in sachets, which is the most affordable manner of reaching the low-end consumer. Key Company Data Relative Share Price Performance Source: Stock Exchange Data Tanzania GDP growth not filtering through FY16A FY17E FY18E EPS (KES) 9.36 11.83 13.20 EPS Growth -26.7% 34.3% -11.7% P/E 24.0x 19.0x 17.0x P/B 15.8x 13.0x 10.2x EV/EBITDA 9.7x 9.8x 8.9x Dividend Yield 5.3% 3.4% 4.1% ROE 77.3% 74.8% 67.0% 1.8 1.6 1.4 1.2 1.0 0.8 0.6 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 EABL Apr-14 Jul-14 The Tanzanian economy continues to grow at an exceptional rate, with the IMF forecasting 2017 GDP growth of 7.2%. This is however not being felt at the consumer level, where net sales in local currency fell 5% over the year. GDP growth has been as a result of public spending and has failed to filter through to the lower income segment of the economy, which forms the largest proportion of the country. Tanzania has witnessed a similar trend to Kenya with consumers shifting to spirits and the emerging beer segment with reserve spirits net sales seeing triple digit growth, although still small on a relative basis. Oct-14 Jan-15 Apr-15 NSE20 Index Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Page 1, Securities Africa Kenya Limited

Revenue / Revenue Growth 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - Revenues / EBITDA / EBITDA Margin 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - Net Income / EPS 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - FY10A FY10A FY11A FY12A Revenue (LHS) FY11A FY12A FY 13A FY 13A FY 14A FY 14A FY 15A FY16A FY17E FY18E Revenue Growth (RHS) FY 15A FY16A FY17E FY18E FY19E FY19E Revenue (LHS) EBITDA EBITDA Margin (RHS) FY10A FY11A FY12A FY 13A FY 14A Net Income (LHS) FY 15A FY16A FY17E EPS (RHS) FY18E FY19E 30% 25% 20% 15% 10% 5% 0% -5% -10% 50% 45% 40% 35% 30% 25% 15.00 14.00 13.00 12.00 11.00 10.00 9.00 8.00 7.00 Potential Risks Political instability in Kenya the upcoming 2017 presidential elections in August, brings a degree of risk of instability and violence which could impact both the operating environment and investor sentiment. Historically, we have seen the private sector reduce investment ahead of elections which at times is substituted by Government spending. However, this year, we are less optimistic on the level of expenditure available to Government. Drought in Kenya rainfall in the short rains season (October to December) last year was well below average, with most farmers expecting poor crop yields. If the situation persists, it could impact the hard work put in by Management s import substitution policy with the decline in the availability of local inputs, and therefore directly impacting operating margins. Furthermore, there could be an indirect impact on demand, as a large percentage of the population derives their income from farming. Continued increase in excise duty there is a chance, albeit low at this point, that the KRA further increases excise duty on alcohol. Management noted that there is currently a lobby against another excise hike. Reduction of remission rate the budget for the 16/17 year included revenue collection of KES 180bn, up from KES 140bn in the previous year. This is optimistic and there is a fear that the remission rate on Senator, currently 90%, might be lowered in order to assist the government to meet their revenue target. This would result in a reduction of the remission rate of 90%, leading to EABL paying higher duties on Senator. Management are lobbying against any reduction in the remission rate, with the argument that this might have an adverse effect on revenue collection with consumers shifting to the illegal alcohol market as a result of the increased cost of Senator. Catalysts Spirits volumes continue to grow the breakout performance has been the 31% increase in net sales in the mainstream spirits segment. The Group feels that the segment is still very underdeveloped and has significant room for expansion. Management has indicated that plans are underway for further capacity expansion in spirits in Kenya and Uganda. Room for growth in Senator with the Senator line nearing full capacity there is also room for further expansion. A decision will be made within the next 6 months as the Company assesses demand and any potential fiscal impact. We believe this decision will be directly related to the excise remission rate that Senator continues to enjoy. Continuation of new products and innovation with new product innovation contribution increasing in Kenya (+20%), Uganda (+31%) and Tanzania (+35%), there is a focus on bringing new and exciting products to market. One of the highlights was that sales in Tusker Cider have been 80% higher than originally estimated. There are plans to refresh the full bottled beer portfolio, e.g. with the 20 year anniversary of Serengeti in Tanzania. Recommendation despite significant headwinds, we feel that external shocks have been fully priced in at the current share price and Management feel that going forward y/y comparables will be more accurate as it is more than 12 months since the last excise hike. The share price has fallen 30% over the last two years and down 35% since the high in February 2015. With a Target price of KES 265 and a forward dividend yield of 3.4%, and trading on attractive valuations (FY18E EV/EBITDA 8.9 and PE 17) EABL offers an attractive return of 21.1% upside from the current price BUY Page 2, Securities Africa Kenya Limited

Bull / Base / Bear Case Scenario Analysis Bull case Price Target KES 332 - Assumptions: Average sales growth of 14.0%, average EBIT margin of 30.6%. Our bull case assumes that the KRA revises their stance on excise duties. Further, the impact of the drought is not as bad as initially forecast, helping the Company continue to expand margins and benefit from volume and price growth. Base case Price Target KES 265 Conservative assumptions: Average sales growth of 6%, average EBIT margin of 28.6%. Our base case assumes that the operating environment remains the same, the KRA holds excise duties steady and the presidential elections are free and fair and void of any violence. Further, GDP growth in Tanzania finally starts to filter through to lower income earners. Bear case Price Target KES 207 Assumptions: Sales fall on average by 2%, average EBIT margin contraction to 26.6%. Our bear case assumes that the impact of the drought is far worse than expected, the elections do not run smoothly and the KRA continues to hike excise duties or reduces the remission rate on Senator. Further, consumers remain under pressure in Tanzania. Peer Comparison East African Breweries Ltd 29.7x 12.4x 1,727 Tanzania Breweries 14.3x 11.7x 1,350 Nigerian Breweries 28.2x 12.1x 2,662 Guinness Nigeria Plc N/A 14.7x 267 SBM MC 21.5x 8.4x 661 SFBT TU 18.3x 11.9x 1,002 Share Ownership Holder Amt Held % Out Diageo Kenya Ltd 338,618,340 42.82 Diageo Holdings 36,361,290 4.60 Guinness Overseas Ltd 20,628,804 2.61 P/E EV/EBITDA Market Cap (USD m) Page 3, Securities Africa Kenya Limited

Income Statement FY16A FY17E FY18E FY19E Net sales 64,322 61,715 68,288 75,635 % y-o-y growth -0.2% -4.1% 10.7% 10.8% EBITDA 20,334 21,115 22,903 25,069 margin 31.6% 34.2% 33.5% 33.1% Depreciation and Amortisation -3,450-3,341-3,442-3,595 EBIT 16,884 17,774 19,462 21,473 margin 31.6% 34.2% 33.5% 33.1% Net financial income/(expenses) -3,265-3,132-3,124-3,088 Other non-operating income - net 0 0 0 0 Profit before tax 13,619 14,641 16,337 18,386 Taxation -5,598-4,685-5,228-5,883 effective tax rate 41.1% 32.0% 32.0% 32.0% Profit after tax 8,021 9,956 11,109 12,502 Extraordinary gain / (loss) 2,249 0 0 0 Minority Interest -620-601 -671-755 Net Income/(Loss) 9,651 9,355 10,439 11,747 Weighted avg. no. of shares (mn) 791 791 791 791 No. of shares outstanding (mn) 791 791 791 791 Basic and diluted EPS - recurring 9.36 11.83 13.20 14.86 Dividend per share 12.00 7.69 9.24 10.40 Cash Flow Statement FY16A FY17E FY18E FY19E Cash generated from operations 27,934 16,339 23,176 24,946 Finance income 281 0 0 0 Finance cost -3,546-3,132-3,124-3,088 Tax paid -6,092-4,685-5,228-5,883 Net cash from operating activities 18,577 8,521 14,824 15,974 Purchase of PP&E -4,870-4,937-4,439-4,538 Purchase of intangible assets -147-147 -147-147 Proceeds from disposal of PP&E 208 208 208 208 Others 3,480 0 0 0 Net cash used in investing activities -1,330-4,877-4,378-4,478 Dividend paid to shareholders -9,626-5,635-6,772-7,621 Others -8,599-1,711-535 -602 Net cash used in financing activities -18,225-7,346-7,307-8,223 Net increase in cash & cash equivalents -978-3,702 3,139 3,274 Opening cash and cash equivalents -1,392-3,954-7,656-4,517 Closing cash & cash equivalents -3,954-7,656-4,517-1,243 Balance Sheet FY16A FY17E FY18E FY19E Inventories 8,131 9,103 9,790 10,978 Trade and other receivables 11,572 10,145 11,225 12,433 Other Current Assets 632 632 632 632 Short-term deposits 0 0 0 0 Cash and bank balances 1,221 0 0 0 Current Assets 21,556 19,879 21,648 24,043 Property, plant and equipments 35,607 36,994 37,784 38,518 Goodwill 3,577 3,577 3,577 3,577 Investments in associate company 0 0 0 0 Other assets 5,246 5,393 5,541 5,688 Non-Current Assets 44,430 45,965 46,901 47,784 Total Assets 65,986 65,844 68,549 71,827 Trade and other payables 21,921 16,688 18,729 21,002 Short term borrowings 0 0 0 0 Other current liabilities 6,049 8,529 5,391 2,117 Current Liabilities 27,969 25,218 24,120 23,118 Non-current Liabilities 27,149 27,149 27,149 27,149 Shareholders' fund 11,283 13,738 17,405 21,531 Minority Interest -416-260 -125 28 Total Liabilities and Equity 65,986 65,844 68,549 71,827 Income Statement Ratios FY16A FY17E FY18E Sales growth -0.2% -4.1% 10.7% EBITDA margin 31.6% 34.2% 33.5% Operating margin 31.6% 34.2% 33.5% Pretax income margin 21.2% 23.7% 23.9% Net margin 15.0% 15.2% 15.3% Dividend payout ratio 128.2% 65.0% 70.0% Tax rate 41.1% 32.0% 32.0% Depn. & Amtn. % of sales 5.4% 5.4% 5.0% Balance Sheet Ratios FY16A FY17E FY18E Return on Average Equity 77.3% 74.8% 67.0% Current ratio 0.8x 0.8x 0.9x Quick ratio 0.5x 0.4x 0.5x Inventory days 119 120 115 Receivable days 59 60 60 Payable days 228 220 220 Cash cycle (51) (40) (45) Net Debt to equity 179.5% 212.0% 149.3% Securities Africa Quattro is our proprietary data package which enables clients to unlock value through fundamental research of historical financial data. Access limited to subscribers only. Page 4, Securities Africa Kenya Limited

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South Africa Nigeria Kenya Securities Africa Limited 24 Hurlingham Road Illovo South Africa Tel: +27 11 243 9030 Securities Africa Financial Limited 5th Floor, Skye Bank Building 30 Marina, Lagos Nigeria Tel: +234 (909) 440 4638 Americas Securities Africa Limited 69 Front Street Hamilton HM12 Bermuda Tel: +1 441 278 7620 Securities Africa Kenya Limited 2nd Floor, The Exchange 55 Westlands Road, Nairobi Kenya Tel: +254 735 571 530