A toast to Africa

Despite soaring raw material costs, lager volumes for Africa grew 11%, including in Tanzania, Mozambique, Botswana and Angola. In the half to end September, revenue adjusted for currency fluctuations was up 31%.

That's higher than other beer-drinking markets. In Latin America lager volumes grew just 3%, and were down in North America (-3%) and even in SA (-1%).

Profit margins are still higher in Europe (18% compared with Africa's 14%), though margins in SA — always one of the most profitable markets for the company — have fallen from 20% to 17%.

“Despite increasing global uncertainty and the threat of a slowdown, our African markets showed strong volume growth momentum,” SABMiller CEO Graham Mackay told the company's interim results presentation last week.

The company will pump nearly US370m into Africa — excluding SA — in capex programmes over five years, this in the context of a total capex programme of $2bn for this year alone. New breweries are being built in Mozambique, Tanzania and Angola. “We need to be operationally flexible and new capacity is still required in Africa,” says Mackay.

What makes Africa so resilient? Absa Asset Management analyst Chris Gilmour says Africa remains somewhat disconnected from global financial markets, and has therefore been more protected from the recent turmoil. And SABMiller doesn't have to fight as hard against competitors as it does in other markets.

“Adding to this, Africa is still in a developmental phase when it comes to alcoholic beverages, so there's also less competition from other products, such as wine and spirits,” says Gilmour.

Rocketing prices for commodities, especially barley and hops, as well as aluminium and glass, have battered the group's overall earnings before interest and tax to 15,6%, 130 basis points below the previous year. However, the Africa portfolio has again been protected. That's because it can also rely on soft drinks and traditional beer, which have different cost bases to clear beer.

Traditional sorghum based beer, for example, grew a record 35% in the past six months. The beer is not vulnerable to international commodity cost increases, because it uses cheaper and locally produced raw materials.

In Africa, SABMiller has also been able to pass on price increases to consumers, with little effect on volumes. “Compared with the increases in food inflation consumers have been experiencing, our price increases of 6%-8% have been modest,” says Mackay.

Compare that to China, where unprecedented price increases slowed the growth of associate company CR Snow.

Africa has also been less affected by consumers trading down from premium brands to mainstream ones, as has happened in Europe.

Prospects in Africa are mixed. In Botswana, the government plans to impose a 30% duty on alcohol during the second half of the financial year, which may dampen volumes. In Angola, though, growth is storming ahead (beer volumes were up 31% in the south), but constrained by poor infrastructure at Luanda harbour. The company is going ahead with a new brewery in the north and a new 2m/hl soft-drinks facility.

Despite investors piling out of emerging markets, BoE analyst Graeme Korner says Africa still offers a good growth story. “Those investors that pulled out of emerging markets are likely to come thundering back,” he says. Consumers in Africa tend not to be as indebted as in developed markets.

But Korner points out that SABMiller could soon face increased competition on the continent.

Source: Financial Mail

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