SAB trims earnings expectations

SAB says its earnings growth this year will not be as high as it had hoped. Image: Panoramio

SAB management told investors the company expected its annual earnings before interest‚ taxes and amortisation (ebita) margin to improve by between 20 and 50 basis points a year. Its previous forecast two years ago was for average annual margin growth of between 30 and 80 basis points.

In its six months ended September last year‚ SAB's ebita margin grew 30 basis points to 21%‚ while parent company SABMiller's reported ebita margin rose 60 basis points to 23.7%.

But SAB executive chairman Norman Adami said while the country had in recent months experienced a "particularly" tough period‚ SAB was confident of its longer-term outlook. It expected gains in economic growth‚ employment and real wages off a relatively low base.

Meanwhile‚ the company is looking to reduce its exposure to rand-dollar volatility‚ which directly and indirectly affected about 75% of its raw material costs‚ Adami said.

He said that SAB has looked to reduce its reliance on imports‚ particularly of malted barley and is building a new maltings plant in Gauteng, which will allow the company to source almost all of its barley requirements locally.

Rising costs

Investec Securities investment analyst Anthony Geard said given pressure on consumers and rising input costs because of the weak rand‚ it shouldn't come as any surprise that SAB had reduced its margin expectations.

Geard said SAB's margins were below the group average largely because of its soft drinks business. "Soft drinks typically have lower margins than beer‚ principally because the soft drink bottler is not the brand owner‚" he said.

Geard said SAB's margin had previously been higher‚ though the company had had to ramp up its advertising and brand support to counter competition. One of its biggest premium brands‚ Amstel‚ was taken by competitor Brandhouse in 2007.

However‚ SAB's Castle Lite brand has continued to show double-digit volume growth in recent reporting periods‚ helping SAB push its local market share to more than 90%.

Geard said SAB was doing "exceptionally well" in gaining market share and this would support management's margin expectations.

"But clearly‚ input costs denominated in dollars have put pressure on the margins. If the rand was flat relative to where it was a couple of years ago‚ we might be talking about between 80 and 100 basis points of margin expansion every year," Geard added.

He said that SAB's efforts to source more inputs from the local market would help boost future margins.