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…well, maybe down.

East African Breweries Ltd

As a recent transplant to the Pacific Northwest I learned two things rather quickly.  One, people are generally more laid back than those of us hailing from the East Coast and two, they take their beer REALLY serious.   Finding a new fondness for the multitude of craft brews available in Portland, I wondered how far the hops obsession may stretch.  So when I recently read of the stock price run-up in Kenya-based, East African Breweries, I thought I’d take a closer look.

East African Breweries Limited (EABL) manufactures branded alcoholic and non-alcoholic beverages. Along with its subsidiaries, the Company is involved in the marketing, brewing, manufacturing and selling of drinks, glass containers, malt and barley. EABL’s core brands include, among others, Tusker, Pilsner, Bell Lager, Guinness, Malta Guinness, Alvaro, Uganda Waragi, Senator, Johnnie Walker and Smirnoff Ice.  While the Company has been Kenya’s best performing stock over the past month, +14.8%, you may wish to take a sip of something else in the near term.

Despite a one year sales increase of +23%, EABL may have run its course for the time being.  With a P/E ratio of 32.8x, the multiple reflects a significant premium currently paid vs. EALB’s industry peers.  Furthermore, the Company’s D/E of 379.1 (MRQ) is certainly not for the risk-averse, especially given the fluctuations of an industry whose consumers lean towards the bargain conscious.

Overall, the beverage alcohol market has seen positive growth across Kenya and other EALB markets.   This should continue, given the young demographics and growth prospects of the region.  Such a robust market has led EALB to follow a mission consisting of strategic acquisitions and increased process improvement initiatives throughout their markets.  However, these initiatives come with a cost.   Premium products force many to seek out cheaper, unregulated brews.  These unregulated brews have become a problem not only for EALB’s bottom-line (as they lose market share), but also for the health of those who consume these products.  The existence of such illicit products also brings increased government regulation.  Keep an eye on recent increases in excise duty within EALB’s markets as continued excises will likely add downward pressure on future sales.

For those barflies out there who still need a taste and cannot access the Nairobi, Uganda, or Dar Es Salaam Exchanges, take a look at Diageo (DEO; $123.16, 5/22/13) of which EALB is a subsidiary.  You will not only get exposure to the high growth markets of East Africa, but also a consistent performer in Diageo.