Diageo Kenya Beating Nigerian Unit on East Africa Push

The push by Diageo Plc (DGE)’s Kenyan unit into the rest of East Africa is helping the company beat the London-based brewer’s Nigerian business in the stock market for a second year.

East African Breweries Ltd., or EABL, has gained 28 percent this year following a 54 percent advance in 2012. Guinness Nigeria Plc is down 3 percent after increasing 10 percent last year. EABL trades at 27.4 times estimated earnings compared with 27.2 times for its West African peer, according to data compiled by Bloomberg. The outperformance will continue in 2014 as the East African market develops, said Esili Eigbe, an analyst at Standard Bank Group Ltd.’s Stanbic IBTC.

EABL is benefiting from its dominance in the beer industry in Kenya, where it controls 95 percent of the market, and an expansion into Uganda, Tanzania, the Democratic Republic of Congo and South Sudan. Guinness, which holds about a third of the nation’s beer market and unlike EABL doesn’t sell spirits, is trying to stem falling profit by adding brands to catch larger competitor Nigerian Breweries Plc. (NB)

“There is a lot of headroom for EABL to accelerate earnings growth relative to Guinness,” Eigbe, who has a buy rating on EABL and a sell on Guinness, said by phone yesterday from Lagos, Nigeria’s commercial capital. The Kenyan unit “is the most dominant player in East Africa” and “very attractive because the market it’s exposed to is pretty wide,” he said.

Photographer: Jacob Silberberg/Bloomberg

Guinness is the West African nation’s largest brewer after Heineken NV’s Nigerian Breweries. Close

Guinness is the West African nation’s largest brewer after Heineken NV’s Nigerian Breweries.

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Photographer: Jacob Silberberg/Bloomberg

Guinness is the West African nation’s largest brewer after Heineken NV’s Nigerian Breweries.

Militant Attacks

Kenya suffered its worst attack in 15 years on Sept. 21 when at least 61 civilians and six soldiers died after gunmen from Somalia’s al-Qaeda-linked al-Shabaab militia entered the upscale Westgate shopping mall in the capital. In Nigeria, thousands of people have died in regular gun and bomb attacks by Islamist militants since 2009 in the north of the country and the capital, Abuja.

“Consumption will not be affected” at EABL because of the assault, Eric Munywoki, a research analyst at Nairobi-based Old Mutual Securities Ltd., said by phone yesterday. The company has multiple brands across Kenya and the region so an attack on a single mall will not have much impact, he said.

The Nigerian Stock Exchange All-Share Index (NGSEINDX) rallied 30 percent this year and Kenya’s main equities gauge increased 36 percent, the best in Africa after Ghana. That compares with a 15 percent increase in the MSCI Frontier Market index. Guinness closed unchanged at 266.70 naira in Lagos. EABL advanced 4 percent to 339 shillings in Nairobi, the highest level since Aug. 7 with volumes 3.1 times the three-month daily average.

Sales Increase

Revenue at EABL increased 6.4 percent in the fiscal year through June with sales in Kenya and Tanzania rising 10 percent and export markets jumping 20 percent, the Nairobi-based company said Aug. 23. At Guinness, annual sales increased 4 percent, the Lagos-based company said Sept. 16. Diageo, the world’s biggest distiller, declined to comment on valuations, James Crampton, a London-based spokesman, said by e-mail Sept. 16 on behalf of all the companies.

Guinness is the West African nation’s largest brewer after Heineken NV (HEIA)’s Nigerian Breweries. EABL’s spirit business accounts for about 20 percent of sales, providing potential for further growth, Andy Gboka, an equity analyst at Exotix Ltd. in London, who has a hold on the Kenyan unit and sell on the Nigerian company, said.

Net income at EABL dropped 38 percent in fiscal 2013 after a one-time gain last year wasn’t repeated. Profit at Guinness slid 17 percent as input and operating costs increased.

‘Well Ahead’

The valuation on EABL “has run well ahead” and the stock may start falling, Munywoki, who has an underweight rating on the brewer, said in an Aug. 27 note. Expenses in fiscal 2012 increased faster than revenue growth, narrowing profit margins, with rising raw material and imports adding to costs, he said.

Nigerian beer volumes may increase 19 percent to 24.7 million hectoliters in 2015, while consumption in East Africa will climb 18 percent to 17.5 million hectoliters, Stanbic IBTC’s Eigbe said by phone on Sept. 17.

EABL “can catch a beverage consumer at many points,” Fungai Tarirah, the head of Africa Investments at Momentum Asset Management who oversees $105 million in pan-African listed equity funds, said Sept. 5 in an interview in London. “Guinness in Nigeria appears to have a more focused, narrower high-end product range, which allows less flexibility in tougher economic environments.”

Nigeria’s economy, the second largest on the continent and home to more than 160 million people, will probably expand 7.2 percent this year, according to the International Monetary Fund. That compares with 4.5 percent to 7.6 percent in East African Community member countries of Kenya, Tanzania, Uganda, Rwanda and Burundi, with a combined 148 million people.

Under Pressure

Nigerian consumers are under pressure after the government reduced fuel subsidies last year and inflation reached 8.2 percent in August. The central bank kept interest rates at a record 12 percent after its Sept. 24 meeting. In Kenya, the central bank held rates at 8.5 percent on Sept. 3, pausing for a second meeting. Inflation accelerated to 8.3 percent in September compared with 6.7 percent in August.

Conditions for Nigerian consumers have been “eroded” by the high cost of loans and removal of fuel subsidies, Guinness Nigeria Chief Executive Officer Seni Adetu said on a conference call Sept. 18. Attacks in the north of the country have impeded the business and hindered the transportation of goods, he said in a June 7 interview

“Nigeria is dominated by Nigerian Breweries,” Exotix’s Gboka said “People feel a bit more comfortable with the business model of EABL than Guinness.”

To contact the reporter on this story: Chris Kay in Abuja at ckay5@bloomberg.net

To contact the editor responsible for this story: Vernon Wessels at vwessels@bloomberg.net

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