ias_ssa_breweries_report_2011

Imara Sub Saharan Africa Breweries Report Cheers to a compelling consumer story… May 2011

Analyst Batanai Matsika +263 772 889 556 [email protected] www.imara.co

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CONTENTS PAGEAfrican Breweries Companies- Fast Facts………………………………………………………………………………………………………………………2Global Executive Summary………………………………………………………………………………………………………………………………………………5Relative Valuation Matrix for SSA and Global Breweries……………………………………………………………………………………………… 8West AfricaWest Africa Industry Overview…………………………………………………………………………………………………………………………………………10Guinness Ghana……………………………………………………………………………………………………………………………………………………………… 11Guinness Nigeria………………………………………………………………………………………………………………………………………………………………14Nigerian Breweries………………………………………………………………………………………………………………………………………………………… 17East AfricaEast Africa Industry Overview…………………………………………………………………………………………………………………………………………20Bralirwa……………………………………………………………………………………………………………………………………………………………………………21East African Breweries Limited………………………………………………………………………………………………………………………………………24Tanzania Breweries Limited……………………………………………………………………………………………………………………………………………27Southern AfricaSouthern Africa Industry Overview…………………………………………………………………………………………………………………………………30African Distillers Limited…………………………………………………………………………………………………………………………………………………31Delta Corporation……………………………………………………………………………………………………………………………………………………………34National Breweries plc……………………………………………………………………………………………………………………………………………………37Namibia Breweries Limited………………………………………………………………………………………………………………………………………………40Phoenix Beverages Limited………………………………………………………………………………………………………………………………………………43SABMiller…………………………………………………………………………………………………………………………………………………………………………46Sechaba……………………………………………………………………………………………………………………………………………………………………………49Zambian Breweries………………………………………………………………………………………………………………………………………………………… 52

Appendix to Abbreviations: AB InBev: Anheuser-Busch InBev Afdis African Distillers Limited BRALIRWA: Brasseries et Limonadereis du Rwanda BRVM: Bourse Régionale des Valeurs Mobiliѐrs BWP: Botswana Pula c: circa CSD: Carbonated Soft Drinks CMBTC: Canadian Malting Barley Technical Centre DSE Dar es Salaam Stock Exchange EABL: East African Breweries Limited EAC: East African Community GDP: Gross Domestic Product GGBL: Guinness Ghana Breweries Limited GHS: Ghanaian cedi GNL: Guiness Nigeria HIPC: Highly Indebted Poor Countries hl: Hectolitres (1 hl= 100 litres) IAS: Imara Africa Securities IES: Imara Edwards Securities IPO: Initial Public Offering KES: Kenyan Shilling LHS: Left Hand Side

MUR: Mauritius Rupee NAD: Namibian Dollar NGN: Nigerian Naira NACADA: National Agency for the Campaign against Drugs Natbrew: National Breweries Limited Nambrew: Namibia Breweries Limited NBL: Nigerian Breweries Limited PBL: Phoenix Beverages Limited pp: per person PRB: Population Reference Bureau RHS: Right Hand Side RWF: Rwandan Franc SADC: Southern African Development Community SSA: Sub-Saharan Africa SBHL: Sechaba Breweries Limited TBL: Tanzania Breweries Limited TZS: Tanzania Shilling USD: United States of America Dollar ZAR: South African Rand Zambrew: Zambian Breweries Limited ZMK: Zambian Kwacha ZSE: Zimbabwe Stock Exchange

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Sub Saharan Africa Breweries-Fast Facts

Table 1: West AfricaCapacity Market Cap Market Cap/hl

Ghana (mhl) (USDm) (USD)

Guiness Ghana 1.1 138.3 125.8

Capacity Market Cap Market Cap/hl

Nigeria (mhl) (USDm) (USD)

Guiness Nigeria 5.5 2,405.9 437.4

Nigerian Breweries 11.0 4,291.3 390.1

Table 2: East AfricaCapacity Market Cap Market Cap/hl

Kenya (mhl) (USDm) (USD)

EABL 9.0 1,916.5 212.9


Tanzania (mhl) (USDm) (USD)

Tanzania Breweries 3.0 353.5 117.8


Rwanda (mhl) (USDm) (USD)

Bralirwa 1.3 152.8 117.5

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Fig 1: Share of Africa’s Population by Income Class

Source: AfDB

Table 3: Southern Africa

Capacity Market Cap Market Cap/hl Capacity Market Cap Market Cap/hl

Botswana (mhl) (USDm) (USD) Zambia (mhl) (USDm) (USD)

Sechaba 2.5 232.1 92.8 Natbrew 1.8 92.0 51.1

Zambrew 2.0 202.7 101.3


Namibia (mhl) (USDm) (USD)

Nambrew 3.0 245.0 81.7 Capacity Market Cap Market Cap/hl

Zimbabwe (mhl) (USDm) (USD)

Capacity Market Cap Market Cap/hl Delta 8.5 941.5 110.8

Mauritius (mhl) (USDm) (USD)

Phoenix Beverages 1.3 120.7 92.9

According to the ADB, Africa's middle class is approximately 30% of the total population. This amounts to 313.0m people on a total population size of 1.0bn people. (Middle Class- Those that spend USD 2 -USD 20/day). On the other hand, McKinsey believes that consumer spending across the continent increased at a compound annual rate of 16% (from 2005 to 2008), which is more than twice the GDP growth rate. In addition, many consumers in SSA have moved from destitute levels of income (less than USD 1,000 a year) to the basic-needs (USD 1,000 to USD 5,000) or middle-income (up to USD 25,000) levels. In Nigeria, for example, the collective buying power of households earning USD 1,000 to USD 5,000 a year doubled from 2000 to 2007, reaching USD 20.0bn. Despite the recent slowdown in economic expansion, GDP per capita should continue on its positive trajectory of a 4.5% compound annual growth rate (CAGR) until 2015. That would mean a more than 35% increase in spending power. Combined with strong population growth (2.0%) and continued urbanisation (3.0%), this increase is estimated to add 221.0m new consumers by 2015. The number of attractive or highly attractive national markets—with more than 10.0m consumers and gross national income exceeding USD 10.0bn a year— is expected to increase to 26 in 2014, from 19 in 2008.

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The Brewing Process Beer is an alcoholic beverage made from the brewing and fermentation of starch. Brewing is the production of beer through steeping a starch source (commonly cereal grains) in water and then fermenting with yeast. The basic ingredients of beer are water; a starch source, such as malted barley which is able to be fermented (converted into alcohol); a brewer's yeast to produce the fermentation; and flavouring such as hops. A secondary starch source (an adjunct) may be used, such as maize (corn), rice or sugar. Less widely used starch sources include millet, sorghum and cassava root in Africa, potato in Brazil, and agave in Mexico, amongst others. The Brewing Process in Detail 1. Malting- This is the process in which the barley grain is made ready for brewing. Malting is broken down into three steps, which help to release the starches in the barley. First, during steeping, the grain is added to a vat with water and allowed to soak for approximately 40 hours. During germination, the grain is spread out on the floor of the germination room for about five days. The final part of malting is kilning. Here, the green malt goes through a very high temperature drying in a kiln. The temperature change is gradual so as not to disturb or damage the enzymes in the grain. When kilning is complete, there is a finished malt product. 2. Milling- This is when the grains that are going to be used in a batch of beer are cracked. Milling the grains makes it easier for them to absorb the water that they are mixed with. Milling can also influence the general characteristics of a beer. 3. Mashing - This is the process of combining a mix of milled grain (typically malted barley with supplementary grains such as corn, sorghum, rye or wheat), known as the "grain bill", and water, known as "liquor", and heating this mixture in a vessel called a "mash tun". 4. Lautering- This is the separation of the wort (the liquid containing the sugar extracted during mashing) from the grains. This is done either in a mash tun outfitted with a false bottom, a lauter tun, or a mash filter. 5. Boiling- Boiling the malt extracts, called wort, ensures its sterility, and thus prevents a lot of infections. During the boiling, hops are added, which contribute bitterness, flavour, and aroma compounds to the beer, and, along with the heat of the boil, causes proteins in the wort to coagulate and the pH of the wort to fall. 6. Fermentation in brewing is the conversion of carbohydrates to alcohols and carbon dioxide or organic acids using yeasts, bacteria, or a combination thereof, under anaerobic conditions. 7. Conditioning- When the sugars in the fermenting beer have been almost completely digested, the fermentation slows down and the yeast starts to settle to the bottom of the tank. At this stage, the beer is cooled to around freezing, which encourages settling of the yeast, and causes proteins to coagulate and settle out with the yeast.

8. Filtering- This process stabilises the flavour and gives beer its polished shine and brilliance. Not all beer is filtered. When tax determination is required by local laws, it is typically done at this stage in a calibrated tank. 9. Packaging- is putting the beer into the containers in which it will leave the brewery. Typically this means putting the beer into bottles, aluminium cans and kegs, but it may include putting the beer into bulk tanks for high-volume customers.


Fig 2: Brewing Process

Source: www.beer-brewingadvice.com

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Global Executive Summary Introduction The case for African breweries is plain as it is supported by demographics and high GDP growth rates. Africa as a continent is experiencing a ballooning population with growth rates of about 2.5%-3.0%. In addition, bottom-heavy demographic charts also ensure that there is scope for a sustained demand pool in most developing nations. According to the latest World Economic Outlook (WEO) report by the IMF, growth in SSA is being led by low-income countries (LICs) which are forecast to grow by 6.0% in 2011. Ghana for example is now the third-largest LIC in the region and is forecast to grow at a double digit growth rate of 13.75% in 2011. With rising crude oil prices, oil producing countries such as Nigeria have bullish macro-economic prospects. Though oil prices have come down recently, foreign currency reserves in Nigeria have climbed 8.0% to about USD 35.0bn. This has translated to positive economic growth. According to provisional data from the National Bureau of Statistics (NBS) in Nigeria, the projected figure for real GDP growth in Q1 2011 is 7.43%. It is also worth noting that the recovery of commodity prices has also meant better fortunes for commodity- driven countries such as Zambia, Botswana, Namibia, Zimbabwe and Rwanda. Global Trends Beer is one of the world’s biggest consumer goods categories. The global beer market is estimated to have grown by 1.6% in 2008 to reach a value of USD 453.9bn. By 2013, the global beer market is forecast to have a value of USD 487.2bn, (increase of 7.3%) with Europe accounting for 49.2% of the total value. According to Canadean, global beer consumption will top 2.0bn hl by 2013. Canadean also notes that although beer consumption was affected by the global economic crisis, global level growth is still relatively robust. In Asia, beer consumption is predicted to grow at a CAGR of 5.0% between 2009 and 2015 while the African beer market is also predicted to grow by 5.0%, Latin America 3.0%, Middle East 5.5%, East Europe 1.5%, North America 0.5% and Western Europe 0.01%. The four largest brewing groups (AB InBev, SABMiller, Heineken and Carlsberg) now account for a combined share of 42% of all beer sold worldwide. With average global per capita consumption forecast at just 30 litres pp in 2015, there is still plenty of potential for further growth. The African Beer Industry There are a number of brewing firms located across Africa with operations ranging from small to large scale producers which have production capacities above 1.0m hl per year. Generally, multinational companies such as SABMiller, Heineken, Castel Group and Diageo command the lion’s share of the market given the capital-intensive nature of brewery operations. Trends in beer consumption in developing countries are often taken as a revealing proxy for economic activity. Economic growth, rising incomes, and a growing share of disposable to total income all tend to drive the consumption of beer in developing countries. While growth in beer consumption has been a modest 2.0% per annum in the past years in most developed markets, it has actually been several times that rate in fast-growing developing countries. Beer consumption in Africa has been experiencing impressive growth on the back of foreign investments in new production and changing consumption patterns.

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Fig 3: World Beer Production (bn hl)

Source:IAS/CMBTC

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Fig 4: World's Top Brewers (Prod. Volumes mhl)

Source:IAS/CMBTC

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East Africa, 14.0

Fig 6: Africa Beer Market (Million hl)

Source: IAS/SABMiller

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Fig 5:World's Top Brands (Value USDm)

Source:IAS/CMBTC

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The Bull Case for African Breweries Bottom-heavy demographic charts guarantee sustained demand. A comparison between population pyramids of the developed countries with that of developing nations clearly shows that there is a rapid increase in the number of young people in developing countries (<15 years) as a result of high birth rates. This implies that virtually all future world population growth will take place in developing countries. With population growth rates of 2.5% - 3.0%, the ballooning populations offer sturdier growth potential for African brewers. It also worth mentioning that about 52 cities in Africa have a population size of more than 1.0m people. In addition, consumer spending in Africa is forecast to rise to approximately USD 1.4trn by 2020, with working-age Africans expected to reach 1.1 bn by 2040 Increased Multinational Company presence World Brewers jostling for market share. Clearly, beer production is a capital intensive process requiring a significant capital outlay. We believe this factor limits the threats of new entrants in the industry and at the same time opens up an opportunity for the larger players, with operational expertise and strong balance sheets. The African beer industry continues to experience increased multinational presence on the back of the potential of the market and the low beer per capita consumption levels. SABMiller Plc (World's No 2 brewer) commands the largest slice of Africa’s beer market share. The brewer has spent about USD 1.5bn over the last three to four years and is eyeing growth in new markets such as Nigeria, Angola, Southern Sudan, Ethiopia, Uganda, Zambia and Mozambique. The group recently commissioned breweries in Angola (North Luanda: 2.5m hl), Mozambique (Nampula: 0.5m hl), Tanzania (Mbeya: 0.5m hl) and has invested in Nigeria (Onitsha: 0.5m hl). Heineken NV, on the other hand, has acquired controlling interests in five breweries in Nigeria through the purchase of two holding companies from Sona Group Nigeria (3.7m hl capacity). Diageo’s Guinness Nigeria Plc is also planning to spend NGN 52.0bn (USD 335.8m) on expanding brewing capacity at its two existing plants in Ikeja and Benin. These planned investments are a clear indication of bullish expectations for African brewers. Consumers trading-up on the back of improved disposable incomes. Over the past five years, the global beer industry has seen a trend towards consumers trading up to more expensive beers. As a result, premium beer has gained more than 40 bps and now constitutes 17.9% of total beer sales. For mainstream beer consumers, particularly in emerging markets (including Africa); the most common trade-up proposition is to attractive, local, premium brands. Down-trading is limited as there are notable instances of consumers continuing to trade up, both into beer and, within the category, into premium products. This, in our view, has resulted in a steady and sustained decline in the demand for traditional beers thus generating sound demand for the more modern and easily accessible beers. Income and Consumption Levels A cross-country GDP/capita analysis reveals a convincing story. An important highlight is the defensive nature of the brewing industry’s products with regards to its ability to grow sales volumes despite over riding economic considerations. Beer demand is resilient and largely inelastic given the habitual nature of alcohol. It can therefore be argued that consumption levels are not entirely linked to economic fortunes but also individual lifestyles. However, with average GDP per capita levels of about USD 3,500 versus USD 32,000 for developed countries, Africa exhibits a strong investment case.

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Fig 7: Africa Demographics

Population (Millions)-LHS Rate of Natural Increase (%)-RHSSource:IAS/PRB

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Fig 8: Developed World Demographics

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Fig 9: Africa-GDP per Capita Vs GDP Growth Rates

GDP per Capita(USD)-LHS GDP Growth Rates-RHSSource:IAS/PRB

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Fig 10: Developed Countries- GDP per Capita Vs GDP Growth Rates

GDP per Capita(USD)-LHS GDP Growth Rates-RHSSource:IAS/PRB

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Per Capita Consumption levels still far from saturation levels. Although Africa is the sixth largest beer producer by volume, producing 4.8% of global beer after China (23%), USA (13%), Russia (6.0%), Brazil (6.0%) and Germany (5.0%), it has one of the lowest global per-capita consumption rates due to the very low purchasing power of consumers. The African region is credited with an average per capita beer consumption of 6.0 litres pp, the lowest of all regions, with the exception of the Middle East (which is significantly lower owing to its large Islamic population). We opine that in the near term, there exists significant headroom for growth in sales volumes and profit margins for African brewers. Only Namibia, Botswana and South Africa have made headway in increasing per capita consumption to near saturation levels. The Bear Case for African Breweries Commodity prices are running a marathon. Generally, rising inflation expectations and actual rate hikes in 2011 are expected to steepen upward-sloping commodity-price curves. Other factors that have sustained higher commodity prices include the increased demand from China and some weather-related factors. In 2010, involuntary supply losses—mostly the result of severe weather—drove risk across a number of commodity markets, helping spur significant price surges in wheat, sugar, rice, coffee, barley, cotton and corn. Generally, high commodity prices coupled with high domestic inflation present a huge risk for beer firms in Africa as they generally lead to a reduction in profit margins. While most firms such as East African Breweries Limited (EABL)and Guinness Ghana Breweries Limited (GGBL) have moved towards cheaper and more drought resistant crops such as sorghum, they still remain largely exposed to commodity price shocks given their requirements of barley and hops for flavouring. Regulation and Controls Not exempt from the “long arms” of Governments. Generally, alcoholic beverages have the highest taxes and excise duty charges in most African countries. Other regulatory requirements are in the areas of distribution, promotions and advertising, labour, pensions and environmental impacts. These laws and regulations have a profound impact on brewing firms. A good example is Sechaba Breweries Holdings Limited (Botswana), a company that has been negatively impacted by levies and government policies. In Kenya, East African Breweries Limited is also likely to be affected by the full effect of the Alcoholic Drinks Control Act, 2010. This is likely to retard sales growth in the future. Religion and Cultural Norms Religious and cultural issues at play. The diverse ethnic and religious groups in Africa have an impact on beer consumption. In predominantly Muslim Sharia compliant countries like Algeria and Libya, alcohol consumption is generally low (and in some Nigerian states as well). Generally, individual faith and lifestyle restrictions advocated by some religions against alcohol consumption may limit growth prospects. With increasing proportions of the populace in Africa, seeking comfort in various religions, consumption levels are likely to be negatively impacted. Another factor is the increasing desire for healthy foods and drinks by some individuals. This may also limit the consumption of alcoholic products as several health campaigns advocate for reduced alcohol intake. Technology and Infrastructural Gaps It’s an era of “power cuts”. Inadequate supply of energy and poor infrastructure impacts greatly on the cost structure and efficiencies in terms of distribution. Inconsistent supply of electricity also impacts negatively on the quality of the product and dependability as at times brewing has to be put on hold or rescheduled to keep processes in line with power outages. Power deficits in SSA have become major stumbling blocks for most industries.

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Fig 11: African Countries- Alcohol Per Capita Consumption

Source:IAS

Source: World Economic Outlook 2011

Fig 12: Commodity Price Graphs

Raw Materials, 15%

Labour, 12%

Packaging, 45%

Advertising , 20%

Administration, 8%

Fig 14: Cost Structure of A Typical Brewery

Source:IAS

Fig 13: World Bank index: Ease of Doing Business

Countries are ranked from 1 to 183. The closer the index is to 1, the more conducive the regulatory environment.

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Relative Valuation Metrics for SSA Breweries

Relative Valuation Metrics for Global Breweries

Market Cap Company (USDm) T+1 T+2 T+1 T+2 T+1 T+2 T+1 T+2 T+1 T+2AB InBev 90,925 14.7 12.9 12.0 10.7 0.9% 1.2% 6.2% 7.8% 29.8% 18.7%Britvic plc 1,738 12.1 10.6 9.1 8.4 3.8% 4.2% 3.2% 6.4% 17.5% 9.5%C&C Group 1,412 12.1 11.4 9.8 8.6 2.2% 2.7% 4.2% 6.7% 4.7% 10.7%Carlsberg 15,013 12.7 10.8 8.7 7.4 0.9% 1.1% 7.1% 9.7% 38.7% 13.6%CEDC 1,730 12.7 10.4 11.5 10.1 0.0% 0.0% 10.8% 5.9% -34.8% 24.8%Davide Camapari 3,558 14.9 13.7 11.1 10.4 1.4% 1.6% 3.2% 6.8% 127.6% 12.6%Diageo 44,802 14.2 13.0 11.4 10.5 3.4% 3.6% 6.9% 6.7% 4.8% 7.1%Heineken 27,219 13.0 12.0 9.7 8.6 2.0% 2.2% 9.1% 7.9% 13.3% 13.0%Pernod Ricard 22,369 13.9 12.1 14.1 12.5 2.1% 2.2% 6.0% 6.5% -0.7% 14.2%Remy Cointreau 3,337 19.0 16.3 16.0 13.2 2.7% 2.9% 3.6% 4.5% 20.2% 22.4%SAB Miller 60,017 15.9 14.4 10.7 9.7 2.3% 2.6% 4.7% 4.6% 24.2% 10.4% Average 14.1 12.5 11.3 10.0 2.0% 2.2% 5.9% 6.7% 22.3% 14.3%Source: JP Morgan, Bloomberg

PER EV/EBITDA Dividend Yield FCF Yield EPS Growth

Company Afdis Bralirwa Delta EABL Guiness Guiness Nambrew Natbrew NB Phoenix SAB Miller Sechaba TBL ZambrewCountry StatisticsCountry Zimbabwe Rwanda Zimbabwe Kenya Nigeria Ghana Namibia Zambia Nigeria Mauritius South Africa Botswana Tanzania ZambiaPopulation (m) 11.7 9.7 11.7 38.8 158.3 23.4 2.1 12.2 158.3 1.3 50.0 1.8 43.2 12.2 Per capita GDP (USD) 438 569 438 938 1,371 755 4,992 1,317 1,371 7,605 6,609 7,032 592 1,317 GDP Growth (Estimates) 8.0% 6.0% 8.0% 6.1% 7.9% 6.6% 1.7% 5.8% 7.9% 4.1% 3.8% 6.6% 6.2% 5.8%Per capita cons. (litres) 41.0 7.0 41.0 11.0 10.5 9.7 45.0 6.0 10.5 15.0 60.0 27.0 7.2 6.0 Company StatisticsCapacity (mhl) 1.30 8.50 9.00 5.50 1.10 3.00 1.80 11.00 1.30 283.61 2.50 3.00 2.00 Production (mhl) 1.25 5.78 8.50 4.90 0.91 2.80 1.70 9.50 1.20 268.40 2.20 2.85 1.60

Capacity Utilisation 96% 68% 94% 89% 83% 93% 94% 86% 92% 95% 88% 95% 80%Market Cap (USDm) 11.4 152.8 941.5 1,916.5 2,405.9 138.3 245.0 92.0 4,291.3 120.7 60,017.3 232.1 353.5 202.7 EV/hl (USD) 119.0 166.2 214.5 464.8 201.7 87.8 55.0 450.8 102.3 237.6 102.2 131.9 188.8 343.8

EV/EBITDA Hist -5.35 7.2 11.8 11.6 14.0 7.2 5.4 9.1 11.9 6.1 12.7 5.3 3.4 11.5 11.5 T + 1 48.1 5.2 7.8 9.6 11.9 5.9 5.1 9.0 10.3 5.5 10.7 6.8 3.2 9.8 9.7 T + 2 4.1 4.3 5.7 8.5 10.4 4.8 4.4 6.6 9.0 4.8 9.7 6.9 2.9 8.7 8.4 Sales Growth (%)Hist 92.8% 16.1% 45.0% 10.3% 22.7% 2.8% 10.4% 16.3% 13.2% 6.2% 7.4% -15.8% 13.7% 19.0% 16.8%T + 1 46.3% 17.0% 66.9% 10.6% 15.0% 21.9% 10.0% 6.3% 15.0% 10.0% 9.8% -20.0% 16.5% 19.0% 17.9%T + 2 39.0% 17.0% 32.3% 10.0% 12.0% 11.0% 12.0% 8.0% 14.5% 10.0% 10.4% 2.0% 10.0% 19.5% 14.2%PERHist na 8.8 17.8 22.9 27.0 n/a 9.9 14.2 21.8 20.8 19.8 12.6 6.1 21.3 20.9 T + 1 na 7.0 12.7 16.9 22.3 n/a 8.9 13.0 18.7 18.5 15.9 15.8 5.7 15.7 17.5 T + 2 5.9 5.5 9.4 15.2 19.2 20.7 7.0 9.3 16.4 16.6 14.4 15.6 5.0 12.9 15.4 PBVHist 2.4 5.6 4.5 7.9 10.9 3.5 2.4 16.3 13.3 1.6 2.7 6.1 2.7 4.6 9.9 T + 1 2.4 5.0 3.5 6.5 9.4 3.7 1.9 15.3 12.7 1.4 2.5 6.1 2.6 4.4 8.9 T + 2 1.7 4.5 2.7 5.9 8.4 3.4 1.6 14.4 12.3 1.3 2.2 6.0 2.4 4.1 8.4 Dividend Yield

Hist 0.0% 11.4% 1.9% 4.2% 3.0% 0.0% 5.4% 7.1% 2.7% 3.2% 2.1% 7.8% 8.2% 0.0% 3.4%T + 1 0.0% 14.3% 2.2% 4.4% 3.6% 0.0% 6.0% 7.7% 5.4% 3.6% 2.3% 6.9% 8.9% 0.0% 4.7%T + 2 0.0% 18.0% 2.7% 4.9% 4.0% 2.3% 7.5% 10.7% 6.1% 3.8% 2.6% 7.4% 10.0% 0.0% 5.4%Earnings Yield

Hist 0.0% 11.4% 5.6% 4.4% 3.7% 0.0% 10.1% 7.1% 4.6% 4.8% 5.1% 8.0% 16.3% 4.7% 5.1%T + 1 0.0% 14.3% 7.9% 5.9% 4.5% 0.0% 11.3% 7.7% 5.4% 5.4% 6.3% 6.3% 17.7% 6.4% 6.1%T + 2 16.8% 18.0% 10.6% 6.6% 5.2% 2.3% 14.2% 10.7% 6.1% 6.0% 6.9% 6.4% 19.8% 7.8% 7.2%EBITDA Margin (%)

Hist -18.6% 26.3% 20.0% 35.7% 23.5% 18.7% 18.0% 15.6% 29.3% 17.1% 17.8% 23.0% 31.8% 12.4% 27.3%T + 1 1.4% 33.5% 26.2% 37.7% 24.6% 18.7% 17.3% 15.0% 29.6% 17.1% 19.2% 22.5% 29.4% 12.4% 28.5%T + 2 12.0% 34.8% 31.6% 37.7% 25.2% 18.9% 18.0% 18.7% 29.3% 17.8% 19.2% 21.6% 29.4% 11.9% 29.1%Weights 0.014 0.085 0.173 0.217 0.012 0.022 0.008 0.387 0.011 0.021 0.032 0.018Source:IAS/Trading Economics

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Production (m hl) Capacity(m hl)Source:IAS

African Breweries- Relative Graphs

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Methodology Our research covers 12 Sub Saharan Africa brewers (Bralirwa, Delta, East African Breweries, Guinness Ghana, Guinness Nigeria, Nambrew, Natbrew, Nigerian Breweries, Phoenix, Sechaba, Tanzania Breweries and Zambrew). We have also included African Distillers (Afdis), a spirit manufacturer in Zimbabwe in our analysis. In addition, a company snapshot for SABMiller was included. Given that the global brewer does not fall under our coverage universe, we have limited our analysis strictly to its prospects and plans in Africa. We largely valued the companies through a comparative valuation technique based on the EV/hl (prod.), given the similar nature of company operations, even across various geographies. However, we have complemented this with Discounted Cash Flow (DCF) valuations. Recommendation and Conclusion Our report clearly indicates that African brewers exhibit a strong investment case. According to the IMF, SSA has recovered from the global financial crisis and the region is now second only to Asia in its rate of expansion. Domestic demand growth remains robust while commodity prices are on a positive trajectory. Overall, real activity in SSA is projected to expand by 5.5% in 2011 and 6.0% in 2012. These conditions, in our view tend to fuel a rise in personal disposable incomes across various geographies and therefore are supportive of the consumer sector that includes breweries and beverage companies.

10

West Africa Industry Overview West Africa remains a hotspot for buying into the continent’s consumer driven growth story. Generally, West Africa is experiencing rapid economic growth owing to the strengthening of oil prices in 2011. Most oil exporting economies have the advantage of using the buoyancy of global oil markets as an opportunity to return to fiscal surpluses and rebuild reserves. Ghana, for example is expected to be the fastest growing economy in SSA, with the IMF forecasting a growth rate of 13.75% in 2011. This is largely due to the commencement of oil production at the Jubilee Oil fields. With a large population in excess of 20.0m and with one of the regions most accomplished political systems, Ghana's business environment is considered to be one of the region’s most encouraging. We anticipate significant investment into the consumer sector over the next few years. From a top down perspective, Nigeria is one of the most attractive countries for investors seeking exposure in the consumer sector on the back of the following points;

Nigeria is an 18.0m hl beer market and is the second largest market in Africa (after South Africa- 28.0m hl);

The above average GDP growth rate of c7.0% is expected to stimulate demand. GDP per capita of USD 1,370 in Nigeria (significantly lower relative to developed world standards) means there is headroom for growth;

There appears to be strong grassroots demand (low per capita consumption of 10.5 litres pp relative to developed markets);

The recent increase in the minimum wage is likely to stimulate private consumption, which is supportive of the beverages and brewing sectors;

Nigeria’s population of 158.3m ensures a massive pool of consumers. This argument is supported by the strong presence of multinational companies in Nigeria. Brewers operating in Nigeria such as Guinness Nigeria and Heineken (Nigerian Breweries) have also announced investment plans to increase capacity in Nigeria. SABMiller is also investing USD 100.0m in the next three years in Nigeria; and

The removal of the ‘bad-debt’ overhang within the

banking sector, by the AMCON, and the improvement in financial performance of the sector is a key ingredient for growth. Despite, a contractionary monetary policy being implemented by the Central Bank of Nigeria (CBN), we contend that “cleaner” balance sheets, will in the long term help unlock credit in the broader economy.

Comment on valuation and pricing A comparative analysis of West African brewers, particularly in Nigeria, indicates that most of the counters are fully valued. This is because of the fact that the main brewers - Nigerian Breweries and Guinness Nigeria - have all announced their investment plans to increase capacity. As a result, share prices have sky rocketed in line with the volume growth expectations amongst investors. Hence the companies are trading at PER’s of about 20x. However, one may argue that the demanding ratings are justified given the demographics and high GDP growth forecasts. On the other hand, Guinness Ghana Breweries Limited (GGBL) appears to be the “diamond in the rough” in the sense that it had been registering losses in prior years but is operating in a potentially high growth beer market.

Table 4 GGBL GNL NBEBITDA Margin 18.7% 23.5% 29.3%RoaE -7.6% 41.8% 63.0%RoaA -2.0% 18.0% 27.3%PER (Hist) n/a 27.0 21.8PER(T+1) n/a 22.3 18.7PBV (Hist) 3.5 10.9 13.3PBV(T+1) 3.7 9.4 12.7EV/EBITDA (Hist) 7.2 14.0 11.9EV/EBITDA (T+1) 5.9 11.9 10.3EV/hl (USD) 201.7 464.8 450.8

Fig 19: Global Oil Prices

Fig 21: Exchange Rate GHS Vs USD

Fig 20: Exchange Rate NGN Vs USD

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11

EQUITY RESEARCH

GHANA

MAY 2011

BREWERIES & BEVERAGES

GUINNESS GHANA BREWERIES LIMITED Bearing the brunt of the pain… The commencement of oil production at the Jubilee Oil fields will place Ghana’s economy on a solid growth trajectory as this will have positive spill-over effects to non-oil sectors of the economy. It is a no brainer that consumer sector players such as the breweries and beverage companies will benefit directly from any increase in GDP per capita and disposable incomes.

Strategically positioned for economic upturn. Guinness Ghana Breweries Limited (GGBL) has managed to maintain its leadership position in the Ghana alcoholic beverages industry over the years (market share of c73% by sales volume). At a per capita GDP of USD 760 and consumption per capita of 9.7 litres pp, there is significant headroom to move in line with other West African averages (GDP per capita of cUSD 1,000), largely driven by the discovery of oil.

Finance costs continue to weigh on positive

financial performance. Despite an impressive 4-year CAGR turnover growth rate of 29%, this growth has not been reflected in the bottom-line owing to high cost of sales and finance costs (Net debt/EBITDA ratio of 4.0x).

There is light at the end of the tunnel. Our argument is broadly based on the assumption that a high GDP growth of c9.0% will translate to an improvement in local consumer demand. However, while there is some scope for a positive earnings surprise in FY 2012, downside risks in the form of gearing and inefficiencies on the cost side emanating from utilities, remain elevated. Based on a combination of our EV/hl comparative technique and a DCF method, we derive a target price of GHS 2.05, implying 61% potential upside. Value-scavengers may consider punting. SPEC BUY.

BLOOMBERG:GGBL:GH SPEC BUYCurrent Price (GHS) 1.27 Current Price (USD) 0.84 Target Price (GHS) 2.05 Target Price (USD) 1.35 Upside/Downside 61.0%LiquidityMarket Cap (GHSm) 209 Market Cap (USDm) 138 Shares (m) 164.7 Free Float 58%Ave. Daily vol ('000) 30.4 Share Price Performance6 Months (GHS) -18.6%Relative change (%)* -17.9%12 Months (GHS) -18.1%Relative change (%)* -24.5%*Relative to MSCI Frontier Market Index

Financials(GHS 000)-FY 30 June 2010 2011F 2012FTurnover 206,499 251,769 279,464 EBITDA 38,611 47,105 52,758 Profit after tax (4,640) (2,285) 10,110EPS (GHS) (0.0) (0.0) 0.1DPS (GHS) - - 0.03 NAV/share (GHS) 0.4 0.3 0.4 Ratios 2010 2011F 2012FGearing 148.6% 153.5% 105.4%RoaA -2.0% -0.9% 4.5%RoaE -7.6% -3.9% 17.0%EV/EBITDA 7.2 5.9 4.8 EV/hl (USD) 201.7 193.4 166.3 PBV (x) 3.5 3.7 3.4 PER (x) n/a n/a 20.7 Earnings Yield 0.0% 0.0% 4.8%Dividend Yield 0.0% 0.0% 2.3%EBITDA margin 18.7% 18.7% 18.9%

STRENGTHS WEAKNESSESManagerial and technical support Highly gearedfrom parent company Exposure to foreign exchangeMarket leader- strategically positioned risks and commodity price for upturn in economy flactuationsWide distribution network

OPPORTUNITIES THREATSGrowth in disposable incomes Competition from importsSpill-over effects of oil Structural constraints- energy revenues from the Jubilee fields and power disruptionsCapacity expansion Currency instabilityBottom heavy demographics

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Guinness Ghana: Price Vs Volume

Volume Traded-RHS Price (GHS)-LHS

12

Nature of Business Guinness Ghana Breweries Limited (GGBL) is involved in the production and sale of beer, stout and malt drinks and ancillary products in Ghana. It also produces Malta Guinness, Amstel Malta and other non-alcoholic beverages. Diageo plc (UK) owns 51% of GGBL, and the remainder is held by a combination of offshore funds and individual shareholders. GGBL operates three breweries: Kaasi and Ahensan in Kumasi and the Achimota Brewery in Accra. Q3 2011 Financial Results Overview GGBL registered an 11.2% growth in net revenues to GHS 179.3m (USD 119.0m) on the back of increased sales volumes. However, the cost of sales increased at a faster pace of 16.5% y-o-y, leading to a decline in the GP margin from 32% in Q3 2010 to 28%. This can be attributed to higher raw material costs (barley prices) and frequent interruptions in the supply of utilities such as power and water. In addition, Ghana adopted a new ad valorem tax regime in 2010. The EBITDA margin declined from 20% in Q3 2010 to 18.6%. Finance costs remained high but declined 20.5% to GHS 16.2m. The decline in finance costs was largely a result of a lower average cost on borrowings. In addition, interest bearing debt declined from GHS 83.5m to GHS 72.9m. Overall, the company posted a profit of GHS 0.9m, which was an improvement on the prior period’s profit of GHS 0.2m. The balance sheet showed a deterioration in the current ratio to 0.36x as a result of a 45.2% increase in current liabilities. There was an improvement, however in cash flow generation given that GHS 37.8m (USD 25.1m) was generated from operations versus a negative GHS 23.5m (USD 15.6m) during the previous period. The net cash flow position improved to GHS 15.2m from a negative GHS 27.7m in Q3 2010. However, taking into account the bank overdraft of a hefty GHS 26.0m (USD 17.3m), the closing balance was negative. Operational Review Cost Management. As a strategy to achieve cost efficiencies, GGBL is increasing the proportion of local raw materials and sourcing from “in-house”/local agricultural projects in Ghana. Our enquiries have revealed that efforts are being made to control margins by replacing barley with locally procured sorghum. This is expected to ensure a steadier supply of raw materials as sorghum is a more drought-tolerant crop than barley. The company is devising strategies to resolve its utility (water and power) constraints so as to limit production cuts. Outlook A recovery in volumes to ensue. Current production levels are in the region of 0.9m hl. However, we estimate a growth of 5.0% to 1.0m hl in FY 2011, which will translate to revenue growth of 22.0% (y.o.y) Valuation and Recommendation Comparing GGBL to its West African peers such as Nigerian Breweries and Guinness Nigeria reveals that the counter is a clear laggard in terms of return measures given that it has been registering losses. In addition, EBITDA margins are thinner owing to finance charges. In future, the company expects to generate positive cash flows that will be directed towards the repayment of debt. While we expect an improvement in cash flow generation on the back of a recovery in volumes and debt repayment initiatives, we do not expect GGBL to be “out of the woods” by FY 2011. Nonetheless, an EV/hl of USD 202/hl versus USD 465/hl for Guinness Nigeria indicates a significant discount (above 50%). SPEC BUY

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Turnover (GHS 000)-LHS Sales Volumes (000 hl)-RHSSource: IAS

Table 5: Shareholder StructureDiageo Highlands BV 51%Heineken Ghanaian Holdings 20%Others 29%Source: IAS

Income Statement (GHS 000) Q3 2010 Q3 2011 % Δ

Net Turnover 161,286 179,290 11.2%COS (110,284) (128,493) 16.5%Gross profit 51,002 50,797 -0.4%Operating Profit 21,012 17,341 -17.5%Net finance charge (20,427) (16,235) -20.5%Profit after tax 209 909 335%EPS (GH) 0.001 0.006 500%Balance Sheet (GHS 000) Q3 2010 Q3 2011 % Δ

Total Assets 192,368 201,046 4.5%NAV 49,548 46,072 -7.0%Current Assets 47,955 42,568 -11.2%Current Liabilities 82,424 119,663 45.2%Current ratio 0.58 0.36Cash flow (GHS 000) H1 2010 H1 2011Operating activities (23,450) 37,799Investing activities (27,285) (22,571)Financing activities 23,078 (56)Net cash flow (27,657) 15,172

Table 6 GGBL GNL NBEBITDA Margin 18.7% 23.5% 29.3%RoaE -7.6% 41.8% 63.0%RoaA -2.0% 18.0% 27.3%PER (Hist) n/a 27.0 21.8 PER(T+1) n/a 22.3 18.7 PBV (Hist) 3.5 10.9 13.3 PBV(T+1) 3.7 9.4 12.7 EV/EBITDA (Hist) 7.2 14.0 11.9 EV/EBITDA (T+1) 5.9 11.9 10.3 EV/hl (USD) 201.7 464.8 450.8

13

GUINNESS GHANA - 4 YEAR CGR COMPARISON

30 JUNE (GHS 000) 2006 2007 2008 2009 2010 2011F 2012F 4yr CAGR

Income StatementTurnover 75,545 93,575 135,810 200,968 206,499 251,769 279,464 29%COS (60,000) (80,000) (83,329) (132,287) (133,277) (161,792) (145,612) 22%Gross Profit 15,545 13,575 52,481 68,681 73,222 89,977 133,851 47%EBITDA 22,000 27,000 25,799 24,855 38,611 47,105 52,758 15%Profit before tax 17,048 14,189 19,607 16,047 (4,410) (2,205) 14,442Taxation (3,018) (1,105) (5,914) (4,612) (230) (80) (4,333)PAT 14,030 13,084 13,693 11,435 (4,640) (2,285) 10,110Dividend Paid (6,126) (6,059) (6,111) (2,777) - - (4,889)RatiosShares(m) 164.7 164.7 164.7 164.7 164.7 164.7 164.7

EPS (GHS) 0.09 0.08 0.08 0.07 (0.03) (0.01) 0.06

DPS (GHS) 0.04 0.04 0.04 0.02 0.00 0.00 0.03

NAV (GHS) 0.30 0.36 0.38 0.39 0.36 0.35 0.38

Dividend Cover 2.29 2.16 2.24 4.12 - - 2.07

Dividend Yield 2.9% 2.9% 2.9% 1.3% 0.0% 0.0% 2.3%EV/EBITDA 10.8 8.2 8.6 9.2 7.2 5.9 4.8

EV (USD)/hl 156.5 146.1 146.2 145.2 201.7 193.4 166.3Growth RatiosSales growth 23.9% 45.1% 48.0% 2.8% 21.9% 11.0%EBITDA growth 22.7% -4.4% -3.7% 55.3% 22.0% 12.0%PBT growth -16.8% 38.2% -18.2% -127.5% -50.0% -755.0%Earnings growth -6.7% 4.7% -16.5% -140.6% -50.8% -542.4%MarginsGP margin 20.6% 14.5% 38.6% 34.2% 35.5% 35.7% 47.9%EBITDA margin 29.1% 28.9% 19.0% 12.4% 18.7% 18.7% 18.9%PBT margin 22.6% 15.2% 14.4% 8.0% -2.1% -0.9% 5.2%Earnings margin 18.6% 14.0% 10.1% 5.7% -2.2% -0.9% 3.6%

14

GUINNESS NIGERIA Thank goodness for Guinness… The Nigerian brewing industry has generally been described as a ‘pseudo duopoly’ on account of the significant size and influence of the two leaders in the industry (Nigerian Breweries and Guinness Nigeria). Guinness Nigeria commands a market share of c30% by value. It is also worth noting that Nigeria has overtaken Ireland as the second largest market in the world for Guinness Stout after Great Britain, accounting for about 40% of Guinness stout sales world wide. The improving economic climate in Nigeria should continue to accelerate sales growth as consumption per capita levels improve.

Bullish investment plans announced. Guinness Nigeria Plc is planning to spend NGN 52.0bn (USD 335.8m) on expanding brewing capacity at its two existing plants in Ikeja and Benin. The expansion project is expected to be complete before December 2011.

Investments to pay off. Guinness Nigeria has

maintained steady growth in revenues over the years given a four-year CAGR of 19%. We expect the company’s investments in capacity expansion and marketing to pay off in FY 2012.

Less compelling relative to SSA peers. Using a universe of SSA brewers, ratings are demanding at an EV/hl of 465/hl. While we see room for upside vis’a vis the low per capita consumption in Nigeria of 10.5 litres pp and anticipated production volumes growth, it appears that market has priced this in. We have assigned equal weighting on our two valuation techniques and derived a fair value of NGN 236 per share. This indicates 6.2% downside risk. Investors should consider taking profits. SELL

BLOOMBERG: GUINNESS:NL SELLCurrent Price (NGN) 251.60 Current Price (USD) 1.63 Target Price (NGN) 236.00 Target Price (USD) 1.53 Upside/Downside -6.2%LiquidityMarket Cap (NGN) 371,110.0 Market Cap (USDm) 2,405.9

Shares (m) 1,475 Free Float (%) 46.0 Ave. Daily vol ('000) 384.8 Share Price Performance6 Months (NGN) 39.8%Relative change (%)* 40.4%12 Months (NGN) 56.3%Relative change (%)* 49.9%*Relative to MSCI Frontier Market Index

Financials (NGNm) FY-31 Dec 2010 2011F 2012FTurnover 109,367 125,772 140,865 EBITDA 25,647 30,909 35,533 Attributable earnings 13,736 16,636 19,371 EPS (NGN) 9.31 11.28 13.13 DPS (NGN) 7.50 9.00 10.00 NAV/share (NGN) 23.19 26.82 29.96 Ratios 2010 2011F 2012FGearing 3.8% 0.0% 0.0%RoaA 18.0% 20.2% 21.4%RoaE 41.8% 45.1% 46.3%EV/EBITDA 14.0 11.9 10.4 EV/hl (USD) 464.8 433.1 420.0 PBV (x) 10.9 9.4 8.4 PER (x) 27.0 22.3 19.2 Earning Yield 3.7% 4.5% 5.2%Dividend Yield 3.0% 3.6% 4.0%EBITDA margin 23% 25% 25%

EQUITY RESEARCH

NIGERIA

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STRENGTHS WEAKNESSESStrong customer loyalty across products Power constraintsSound mangerial and technical expertise Short term Naira weaknesssupplied by parent company Inflation may affect incomesContinued infrastructural development

OPPORTUNITIES THREATSDevelopment of gas fields and further Niger Delta violenceinfrastructural development Commodity price volatilityRising per capita income Infrastructural constraintsBottom heavy demographics Increased competition from new

and existing playersSAB Miller's recent entry into theNigerian market

15

Nature of Business Guinness Nigeria is a brewer of premium alcoholic and non alcoholic drinks and is the second largest brewer in Nigeria. It was incorporated in 1962 with the building of a brewery in Ikeja, the heart of Lagos. Other breweries that have been opened over time include Benin City brewery in 1974 and Ogba brewery in 1982. Guinness Nigeria is reputed for brands such as Foreign Extra Stout, Guinness Extra Smooth, Malta Guinness, Harp Lager Beer, Gordon’s Spark, Smirnoff Ice and Satzenbrau. Guinness Nigeria Plc is 58% owned by the Diageo Group (UK), a multinational beer, wine and spirits company, trading in over 180 markets around the world. Diageo’s top markets for the Guinness brand are Great Britain, Nigeria and Ireland. Q3 2011 Financial Results Overview While turnover grew 11.4% to NGN 89.8bn (USD 572.0m), PBT increased by 27.7% to NGN 17.6bn, as margins increased, with the PBT margin increasing to 19.6%. The improvements in margins can be attributed to the easing of capacity constraints due to new outsourcing arrangements. Overall, the brewer posted a profit after tax of NGN 11.9bn, indicating 32% growth ahead of Q3 2010. Operational Review Volume increases in Harp and Malta Guinness. Guinness has continued to pursue organic growth via its expansion strategy, strengthening its existing brand portfolio and packaging capabilities. It is worth noting that the brewer’s Harp lager brand has taken market share from Star (Nigerian Breweries Plc) as sales volumes for Harp have more than doubled during the years and have firmly crossed the 1.0m hl mark. Harp competes directly with Nigerian Breweries’ brands. According to management, Guinness Nigeria has a volume market share of 20% and has taken approximately 2% from Nigerian breweries in the past 12 months. Management also estimates that its value market share is around 30%. Poor exposure to the low-cost beer segment. Guinness Nigeria’s exposure to the lower-end beer segment is generally poor relative to its competitors. While Harp larger volumes have increased, Guinness’ focus on premium products has limited further market share growth given Nigeria’s flourishing beer industry. However, management is optimistic that strong GDP growth in Nigeria will gradually lead to a higher proportion of a more affluent middle class which can afford the company’s premium products. Outlook Initiatives are aimed at retaining and growing market share. Guinness has played host to several initiatives to cushion its market share from potential erosion and maintain its position relative to its peers in other countries around the world. Margins are likely to remain under pressure (EBITDA margins of c25%) due to increased competition from Nigerian Breweries following a recent strategic acquisition by its parent body, Heineken. However, Guinness has responded through its plans to invest NGN 52.0bn (USD 335.8m) on expanding brewing capacity at existing plants in Ikeja and Benin. As a result, we estimate sales volumes to grow at a CAGR of 11.0% to 6.0m hl in FY 2012. Valuation and Recommendation On a relative basis, Guinness Nigeria’s PER of 27.0x is in line with Nigerian Breweries (21.8x). However, an EV/hl of USD 465/hl is demanding relative to our SSA weighted average of USD 345/hl and USD 450/hl for Nigerian Breweries. Return measures for Guinness Nigeria are also significantly lower. While we anticipate an improvement as economies of scale benefits come through from the expansion, we see limited prospects for capital gains. SELL

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Table 7: Shareholder StructureGuinness Overseas Ltd 46.03%Atlantaf Limited 7.77%Other shareholders 46.20%

Source: IAS

Table 8 GGBL GNL NBEBITDA Margin 18.7% 23.5% 29.3%RoaE -7.6% 41.8% 63.0%RoaA -2.0% 18.0% 27.3%PER (Hist) n/a 27.0 21.8 PER(T+1) n/a 22.3 18.7 PBV (Hist) 3.5 10.9 13.3 PBV(T+1) 3.7 9.4 12.7 EV/EBITDA (Hist) 7.2 14.0 11.9 EV/EBITDA (T+1) 5.9 11.9 10.3 EV/hl (USD) 201.7 464.8 450.8

Income Statement (NGNm) Q3 2010 Q3 2011 % Δ

Turnover 80,576 89,801 11.4%Profit before tax 13,754 17,562 27.7%Tax (4,704) (5,620) 19.5%Profit after tax 9,049 11,942 32.0%

PBT margin 17.1% 19.6%PAT margin 11.2% 13.3%

16

GUINNESS NIGERIA - 4 YEAR CGR COMPARISON

31 DECEMBER (NGNm) 2006 2007 2008 2009 2010 2011F 2012F 4yr CAGR

Income StatementSales 53,652 62,265 69,173 89,148 109,367 125,772 140,865 19%COS (27,845) (34,144) (35,611) (45,763) (61,672) (70,923) (78,015) 22%Gross Profit 25,807 28,121 33,562 43,385 47,695 54,849 62,850 17%GP Margin 48% 45% 49% 49% 44% 44% 45%Distribution and Admin (6,834) (5,781) (7,230) (10,976) (14,260) (15,686) (18,980) 20%Other expenses (4,072) (5,349) (6,164) (7,796) (8,568) (9,424) (9,519) 20%Operating Profit 14,901 16,991 20,168 24,613 24,867 29,739 34,351 14%Other Income - - - 232 780 1,170 1,182

EBITDA 14,901 16,991 20,168 24,845 25,647 30,909 35,533 15%D&A (2,677) (2,764) (3,126) (3,776) (4,536) (4,740) (4,953) 14%Interest Income/(expense) (787) 657 1,293 (815) (797) (1,054) (1,116) 0%Profit before Tax 11,437 14,884 17,092 18,992 19,989 24,464 28,487 15%Taxation (3,997) (4,193) (5,232) (5,451) (6,252) (7,829) (9,116) 12%Profit after Tax 7,440 10,691 11,860 13,541 13,736 16,636 19,371 17%RatiosWeighted shares 1,363.4 1,363.4 1,474.9 1,474.9 1,474.9 1,474.9 1,474.9 EPS(NGN) 5.5 7.8 8.0 9.2 9.3 11.3 13.1 DPS(NGN) 3.5 4.9 6.0 12.8 7.5 9.0 10.0 Dividend Cover 1.58 1.61 1.34 0.72 1.24 1.25 1.31Dividend Yield 1.4% 1.9% 2.4% 5.1% 3.0% 3.6% 4.0%Growth RatiosSales growth 16.1% 11.1% 28.9% 22.7% 15.0% 12.0%EBITDA growth 14.0% 18.7% 23.2% 3.2% 20.5% 15.0%OP growth 14.0% 18.7% 22.0% 1.0% 19.6% 15.5%PBT growth 30.1% 14.8% 11.1% 5.2% 22.4% 16.4%PAT growth 43.7% 10.9% 14.2% 1.4% 21.1% 16.4%MarginsGross margin 48.1% 45.2% 48.5% 48.7% 43.6% 43.6% 44.6%Op margin 27.8% 27.3% 29.2% 27.6% 22.7% 23.6% 24.4%PBT margin 21.3% 23.9% 24.7% 21.3% 18.3% 19.5% 20.2%PAT margin 13.9% 17.2% 17.1% 15.2% 12.6% 13.2% 13.8%Effective Tax Rate 34.9% 28.2% 30.6% 28.7% 31.3% 32.0% 32.0%EBITDA margin 27.8% 27.3% 29.2% 27.9% 23.5% 24.6% 25.2%

17

NIGERIAN BREWERIES Plc Betting on the Right Horse? Nigeria is an 18.0m hl beer market, the second largest market in Africa (after South Africa), and has been growing at an annual rate of 9.0% in the 10 years to 2009. The market is dominated by Heineken, with around 70% market share, and Diageo's Guinness business with over 25% and SABMiller, with less than 5.0%. We expect Nigeria’s per capita GDP to increase owing to the above average GDP growth forecasts of c8.0%. While Guinness Nigeria leads the stout segment with its Guinness Stout and Guinness Extra Smooth brands, Nigerian Breweries has a strong presence in the clear beer market, with its brands Star and Gulder being the leading brands in Nigeria.

Possible consolidation with five breweries. We

expect Nigerian Breweries (NB) to be involved in a corporate action in 2011. Heineken NV, NB’s parent company announced that it acquired controlling interests in five breweries in Nigeria. The transaction was concluded by purchasing two holding companies from Sona Group Nigeria. The acquisition would bring additional capacity of 3.7m hl so as to alleviate capacity constraints in the market and to improve the geographic spread of its production. Heineken currently has capacity of about 12.0m hl in Nigeria.

Highly defensive stock. We like Nigerian Breweries primarily for its dominant position in the sector. In addition, the company has the ability to convert volume growth into margin expansion due to economies of scale. Another key element is that Nigerian Breweries is highly exposed to a burgeoning lower-end beer segment in Nigeria. Within the SSA context, ratings are demanding at an EV/hl of USD 450/hl. However, this is a “must have” stock within the Nigerian consumer space. Our valuation method ascribes a fair value of NGN 89 per share. HOLD.

BLOOMBERG: NB:NL HOLDCurrent Price (NGN) 87.50 Current Price (USD) 0.57 Target Price (NGN) 89.00 Target Price (USD) 0.58 Upside/downside 1.7%LiquidityMarket Cap (NGN) 661,724 Market Cap (USDm) 4,291 Shares (m) 7,563 Free Float (%)Ave. Daily vol ('000) 2,140.0 Share Price Performance6 Months (NGN) 10.8%Relative change (%)* 11.5%12 Months (NGN) 20.7%Relative change (%)* 14.3%*Relative to MSCI Frontier Market Index

Financials (NGNm)-FY 31 Dec 2010 2011F 2012FTurnover 185,863 213,742 244,735 EBITDA 54,482 63,299 71,736 Attributable earnings 30,332 35,467 40,430 EPS (NGN) 4.01 4.69 5.35 DPS (NGN) 2.40 4.69 5.35 NAV/share (NGN) 6.57 6.91 7.13 Ratios 2010 2011F 2012FGearing 0.0% 0.0% 0.0%RoaA 27.3% 29.5% 31.1%RoaE 63.0% 69.6% 76.2%EV/EBITDA 11.9 10.3 9.0 EV/hl 450.8 425.1 400.9 PBV (x) 13.3 12.7 12.3 PER (x) 21.8 18.7 16.4 Earnings Yield 4.6% 5.4% 6.1%Dividend Yield 2.7% 5.4% 6.1%EBITDA margin 29.3% 29.6% 29.3%

EQUITY RESEARCH

NIGERIA

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Nigerian Breweries: Price Vs Volume

Volume Traded-RHS Price (NGN)-LHS

STRENGTHS WEAKNESSESWide distribution network Corruption100% dividend payout policy (historically) Short term Naira & oil price weaknessDiversified product range through Inflation may affect incomesHeineken and constant product innovationLargest market share of c70%

OPPORTUNITIES THREATSPotential for increased capacity (Sona) Infrastructural constraints (power)as a result of consolidation Commodity price volatilityMinimum wage increases to drive Competition from cheap imports and consumption levels local players (Guiness, SAB Miller) Rising middle class population

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18

Nature of Operations Nigerian Breweries Plc (“NB”) was incorporated in Nigeria on 16 November 1946 and commenced operations in 1949 at its Lagos brewery with the roll out of the first bottle of Star Lager beer. The company is a subsidiary of Heineken N.V. Nigerian Breweries has enjoyed over 60 years brewing experience in the Nigerian brewing industry with a resulting bouquet of tested and trusted brands. These brands include: Star Lager, Gulder Lager, Maltina, Legend Extra Stout and Fayrouz. Q1 2011 Financial Results Overview NB registered turnover growth of 28.1% to NGN 40.6bn. The growth was also driven by robust volume growth in the larger and malt drink segments. PBT and PAT grew 25.8% and 22.7%, respectively. The increase was the result of an improvement in the supply of products and cost advantages emanating from increased investment in capacity. The PBT margin declined marginally to 22.8%, signalling the effect of rising costs of prime raw materials. However, the price of barley receded by c3.0% Overall, PAT was NGN 7.9bn (up 22.7% y-o-y). Operational Review Room to grow capacity. We believe there is still room for Nigerian Breweries to grow its production capacity organically. At current production levels of about 9.5m hl, the company has spare capacity to grow output to about 11.0m hl (installed capacity), in line with increasing per capita consumption, which is currently at 10.5 litres pp. Volume growth through external acquisitions. Nigerian Breweries is planning to purchase two local beer-makers (Sona Systems Associates Business Management and Life Breweries). The acquisitions are aimed at adding market share in Africa’s most populous country while avoiding the cost of constructing new factories. In addition, it will strengthen its market coverage, market share and efficiency. Management has indicated that if the acquisition is not concluded, the group might also consider building a new brewery. The acquisitions will give NB five additional beer-making plants across the country and will increase production capacity by about 2.0m hl to 13.0m hl. Outlook The demand/ supply mismatch still evident. Despite the company’s commendable production levels of c9.5m hl, this is in actual fact still inadequate to meet the existing demand for the company’s products. As a result, we expect additional capacity investments, financed largely from internal cash flows to help improve subsisting production capacity in order to close the demand/ supply mismatch. Valuation and Recommendation Although NB has fatter EBITDA margins of c29% and above average return measures (RoaE and RoaA), compared with GGBL and GNL, its EV/hl of USD 448/hl implies that it is one of the most expensive West African brewers. However, we feel that its dominant position (market share of 70%) justifies these ratings. With about 42% of the 158m population below the age of 15 years, Nigeria has the strongest case in Africa for growth in the beverages sector. While population growth in the region is estimated at about 2.0%-3.0% per year, we strongly feel that it guarantees a sustainable demand pool in the future for Nigerian Breweries. Another key driver of course is the relatively low per capita consumption of about 10.5 litres pp. HOLD

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Table 9: Top Shareholders' ListHeineken Brouwerjen BV 37.7%Distell Trading International BV 16.4%Others 45.9%Source:IAS

Table 10 GGBL GNL NBEBITDA Margin 18.7% 23.5% 29.3%RoaE -7.6% 41.8% 63.0%RoaA -2.0% 18.0% 27.3%PER (Hist) n/a 27.0 21.8PER(T+1) n/a 22.3 18.7PBV (Hist) 3.5 10.9 13.3PBV(T+1) 3.7 9.4 12.7EV/EBITDA (Hist) 7.2 14.0 11.9EV/EBITDA (T+1) 5.9 11.9 10.3EV/hl (USD) 201.7 464.8 450.8

Income Statement (NGNm) Q1 2010 Q1 2011 % Δ

Turnover 40,574 52,029 28.2%Profit before tax 9,426 11,856 25.8%Tax (2,969) (3,936) 32.6%Profit after tax 6,456 7,919 22.7%PBT Margin 23.2% 22.8%PAT Margin 15.9% 15.2%

19

NIGERIAN BREWERIES- 4 YEAR CGR COMPARISON

31 DECEMBER (NGNm) 2006 2007 2008 2009 2010 2011F 2012F 4yr CAGR

Income StatementSales 86,322 111,748 145,462 164,207 185,863 213,742 244,735 21%COS (41,990) (52,564) (74,562) (88,734) (97,608) (111,146) (124,815) 23%Gross Profit 44,332 59,184 70,900 75,472 88,255 102,596 119,920 19%GP Margin 51% 53% 49% 46% 47% 48% 49%Selling , Distrib and admin (27,507) (32,077) (34,314) (33,955) (43,288) (49,782) (59,738) 12%EBITDA 16,949 27,357 43,110 48,457 54,482 63,299 71,736 34%EBITDA Margin 20% 24% 30% 30% 29% 30% 29%Interest Income/(expense) (512.2) 519.3 741.3 (262.5) (86.4) (88.1) (89.9) -36%Profit before Tax 16,469.3 27,823.7 37,469.5 41,399.8 44,880.2 52,935.2 60,342.7 28%Taxation (5,536) (8,934) (11,818) (13,490) (14,548) (17,469) (19,913) 27%Profit after Tax 10,934 18,890 25,652 27,910 30,332 35,467 40,430 29%RatiosWeighted shares (m) 7,562.6 7,562.6 7,562.6 7,562.6 7,562.6 7,562.6 7,562.6 EPS (NGN) 1.45 2.50 3.39 3.69 4.01 4.69 5.35 DPS (NGN) 1.45 2.50 3.39 3.69 2.40 4.69 5.35 Dividend Cover 1.0 1.0 1.0 1.0 1.7 1.0 1.0 Dividend Yield 1.66% 2.86% 3.87% 4.22% 2.74% 5.36% 6.11%Sales (mhl) - - 8.3 8.8 9.3 9.9 10.5 EV/hl (USD) 503.7 478.0 450.8 425.1 400.9 Growth RatiosSales growth 29.5% 30.2% 12.9% 13.2% 15.0% 14.5%OP growth 61.1% 35.0% 13.5% 8.3% 17.5% 13.9%Opex growth 16.6% 7.0% -1.0% 27.5% 15.0% 20.0%PBT growth 68.9% 34.7% 10.5% 8.4% 17.9% 14.0%NI growth 72.8% 35.8% 8.8% 8.7% 16.9% 14.0%MarginsGross margin 51.4% 53.0% 48.7% 46.0% 47.5% 48.0% 49.0%EBITDA margin 19.6% 24.5% 29.6% 29.5% 29.3% 29.6% 29.3%PBT margin 19.1% 24.9% 25.8% 25.2% 24.1% 24.8% 24.7%PAT margin 12.7% 16.9% 17.6% 17.0% 16.3% 16.6% 16.5%Effective Tax Rate 33.6% 32.1% 31.5% 32.6% 32.4% 33.0% 33.0%

20

East Africa Industry Overview Kenya as a country possesses some of the truest emerging market credentials of all the countries in Africa, driven by bank lending, an emerging middle classes and rapid growth in consumption. The country is considered as the gateway to Eastern Africa, situated in an enviable position, surrounded by six landlocked post-conflict countries. The capital, Nairobi is generally used as the hub to supply a 300.0m strong population catchment area. Due to its developed infrastructure, Kenya also acts as the base for multinationals in the region and has huge strategic importance to the West for military and humanitarian reasons. Generally, growth of beer production in the EAC region has been stagnant, albeit with Kenya production well ahead of other countries. East African Breweries Limited (EABL) is the largest brewer in the region, producing approximately 5.0m hl of beer per annum. The other major player in the region is SABMiller, which has about 80% market share in Tanzania and 52% in Uganda. Increased economic integration in the EAC region is likely to lead to strong economic gains, particularly for the smaller nations. Rwanda for example, has developed into an attractive investment destination and has registered strong macro-economic growth, with GDP expanding at an average rate of 8.8% y-o-y since 2004. GDP growth rates of 11.6% in 2008 and 6.0% in 2009 for Rwanda were in actual fact the highest in East Africa. Further trade promotion in East Africa could also lead to the creation of a monetary union. There is also scope for further cooperation between countries. For example, countries with comparative manufacturing advantages such as Kenya can increase exports to Rwanda, Burundi, Uganda and South Sudan. Overall, the following points are supportive of brewers operating in East Africa;

Low alcohol consumption of under 12 litres pp; and Stable top down fundamentals with the region experiencing

steady economic growth of c5.0%, leading to a growth in disposable incomes.

However the main risks are as follows;

Increased competition from imports; and The region is prone to drought which has a negative impact

on GDP growth given the high agricultural component contribution to GDP. For example, the IMF recently cut its 2011 growth forecast for Tanzania from 7.0% to 6.0%. The international institution projects output growth for 2011 to decline largely as a result of widespread weather-induced power shortages. Kenya is currently experiencing a drought and this has also affected some parts of Tanzania.

Comment on valuation and pricing Generally, brewers in East Africa are cheap on a broader SSA comparison matrix given an average EV/hl of about USD 155/hl versus a SSA weighted average of USD 344/hl. Comparatively, the smaller brewers in East Africa by volumes (Bralirwa and Tanzania Breweries) have attractive ratings relative to East African Breweries (EABL). The main set back however is that foreign investors have limited ways to gain exposure given the low free-float in Bralirwa and foreign shareholding limits on Tanzania Breweries. We also highlight the fact that regulatory threats affecting EABL can potentially limit growth, particularly in Kenya.

Table 11 Bralirwa EABL TBLEBITDA Margin 26.3% 35.7% 31.8%RoaE 45.6% 35.4% 48.8%RoaA 18.3% 19.7% 21.8%PER (Hist) 8.8 22.9 6.1PER(T+1) 7.0 16.9 5.7PBV (Hist) 5.6 7.9 2.7PBV(T+1) 5.0 6.5 2.6EV/EBITDA (Hist) 7.2 11.6 3.4EV/EBITDA (T+1) 5.2 9.6 3.2EV/hl (USD) 119.0 214.5 131.9

Fig 27: Exchange Rate RWF Vs USD

Fig 29: Exchange Rate TZS Vs USD

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21

BRALIRWA New to the market but an old player in the brewing game…

At an alcohol consumption per capita of 7.0 litres pp, Rwanda is still below its East African peers such as Kenya (11 litres pp) and Burundu (18 litres pp). This gap, in our view represents upside potential for Bralirwa, which is a dominant market player in the Rwandan brewing industry.

An oversubscribed IPO reflects an undisputed

investment story. As part of the Government of Rwanda’s privatisation and divestiture programme aimed at reducing its direct role in some of its public entities, the Government sold its 25% stake comprising of 128,570,000 ordinary shares in Bralirwa through an offer for sale and listing of the company’s shares on the Rwanda Stock Exchange. The IPO was almost three times oversubscribed. Applications totalled USD 80.0m, compared with the required USD 29.5m.

Ahead of the pack in terms of market share. For

most of its 50 year presence in Rwanda, Bralirwa has been the sole brewer and sparkling beverages manufacturer in the country. Despite the recent opening of local brewery Brasserie des Mille Collines, (BMC), and the launch of its Skol beer brand, Bralirwa’s market share is expected to remain strong at c94%.

It’s a question of timing. While the current share price represents a 29% premium to its IPO price (RWF 136), Bralirwa’s share price has de-rated from a peak of RWF 235. We believe now is an opportune time to snap up shares. An EV/hl of USD 119/hl represents a 65% discount to our SSA sector average. Our two valuation approaches point to a target price of RWF 225 per share, indicating 45% upside potential. BUY

EQUITY RESEARCH

RWANDA

MAY 2011


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BRALIRWA: Price VS Volume

Volume Traded-RHS Price (RWF)-LHS

BLOOMBERG: NQ* BUYCurrent Price (RWF) 176.00 Current Price (USD) 0.30 Target Price (RWF) 255.00 Target Price (USD) 0.43 Upside/Downside 44.9%

Market Cap (RWFm) 90,464.0 Market Cap (USDm) 152.8 Shares (m) 514.0 Free Float (%) 25.0 Ave. Daily vol ('000) 336.2 Share price performance6 Months (RWF) -25.1%Relative change (%)* -24.5%12 Months (RWF) -25.1%Relative change (%)* -31.5%*Relative to MSCI Frontier Market Index

Financials (RWFm)-FY 31 Dec 2010 2011F 2012FTurnover 52,799 61,774 72,276 EBITDA 17,673 21,499 26,401 Attributable earnings 10,331 12,961 16,314 EPS (RWF) 20.1 25.2 31.7 DPS (RWF) 20.1 25.2 31.7 NAV/share (RWF) 31.3 35.1 39.4 Ratios 2010 2011F 2012FGearing 1.8% 0.1% 1.4%RoaA 18.3% 27.3% 32.2%RoaE 45.6% 66.0% 75.9%EV/EBITDA 7.2 5.2 4.3 EV/hl (USD) 119.0 124.2 110.6 PBV (x) 5.6 5.0 4.5 PER (x) 8.8 7.0 5.5 Earnings Yield 11.4% 14.3% 18.0%Dividend Yield 11.4% 14.3% 18.0%EBITDA margin 26.3% 33.5% 34.8%*Not qouted on Bloomberg

STRENGTHS WEAKNESSESSole bottler of Coca- cola Land locked nature of Rwanda increasesWide distribution network the costs of importing input materialMarket leader (Mkt Share of 94% -Beer) High cost of energy (US22c/Kw hr)Product support from Heineken

OPPORTUNITIES THREATSMacro-economic growth in Rwanda Increased competition from importsGrowth in disposable incomes Political risksMassive population growth Seasonal fluctuations in demandLucrative export markets in East Africa Changes in laws, tax and excise duty

22

Nature of Operations Bralirwa is the leading producer of beer and sparkling beverages in Rwanda. It is a subsidiary of the Heineken Group, which owns 75% of the company. Bralirwa has two subsidiaries, Bramin (50%) a maize growing company and Cogelgas (62.4%), a company involved in methane gas production. Bralirwa’s estimated market share for breweries and beverages in Rwanda is estimated at 94% and 97%, respectively. The key beer brands include Primus, Mutzig, Amstel, Heineken, Guinness and Turbo King. With the exception of Heineken beer, all the other beers are locally produced by the Company. Bralirwa is the sole bottler of Coca-Cola in Rwanda and its CSD brands include Coca Cola, Coke Zero, Fanta, Krest Tonic and Vitalo Eau Gazeuse (carbonated water). FY 2010 Financial Results Overview Bralirwa registered a 16.1% top line growth in FY 2010 to RWF 52.8bn (USD 89.9m). Beer sales contributed 73% to total revenues, whilst CSDs contributed 27%. Volumes were up 12.5% to 1.365m hl (FY 2009: 1.213m hl) as a result of strong growth of the Primus and Mützig beer brands and higher soft drink sales. The EBITDA margin improved to 33.2% (27.2%: FY 2009). Overall, the group posted earnings of RWF 10.3bn (USD 17.5m), representing a 62.8% y-o-y growth. A total dividend of RWF 20.09 per share for 2010 was proposed, indicating a 100% dividend payout. Operational Review Production volumes to grow beyond 1.4m hl. Production volumes are expected to grow beyond 1.4m hl in FY 2012. In 2010, volumes have increased 12.5% to approximately 1.365m hl. The Gisenyi Brewery which was commissioned in 1959 and primarily produces beer brands has a current production capacity of about 1.2m hl per annum. Over 130.0m bottles are produced annually and beer volumes have increased over the past 10 years from 440,000hl in 2000 to 925,000hl in 2010 (CAGR of 7.0%). In 2011, capacity will be further expanded by adding additional fermentation tanks and a capacity extension of the brew house. The sparkling beverages plant, located in Kicukiro and constructed in 1974, has an installed capacity of about 300,000hl. However, the plant facilities have been upgraded over the years and production levels are also expected to increase. Outlook Strengthening mainstream brands. The company’s growth strategy will hinge mainly on the national brand, Primus, which is seen as the brand that will create the greatest growth in consumption as the lower strata of society experiences increased disposable incomes with the expansion of the Rwandese agro-based economy. Primus is seen as an aspirational product amongst the lower income earners. Competition can be shaken off. Bralirwa remains relevant in its market place through its world class products, supported by Heineken. This advantage, in our view, enables the company to tap into the rising per capita incomes in Rwanda as consumers move up the ‘drinking curve’. In addition, the company’s most popular brands, Primus and Mutzig have a combined market share of 88% and are the two leading beer brands in Rwanda. Valuation and Recommendation Bralirwa’s EBITDA margin of approximately 26% is the lowest amongst it East African peers (TBL and EABL). However an EV/hl of USD 119/hl is the lowest on a sample of East African Breweries. The share price has de-rated from a peak of RWF 235 to RWF 176. We believe now is an opportune time to snap up shares. Using a relative comparative technique and the DCF method, we generated a fair value of RWF 255 per share. BUY

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Fig 30: Bralirwa Production Volumes (hl)

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Table 13 Bralirwa EABL TBLEBITDA Margin 26.3% 35.7% 31.8%RoaE 45.6% 35.4% 48.8%RoaA 18.3% 19.7% 21.8%PER (Hist) 8.8 22.9 6.1 PER(T+1) 7.0 16.9 5.7 PBV (Hist) 5.6 7.9 2.7 PBV(T+1) 5.0 6.5 2.6 EV/EBITDA (Hist) 7.2 11.6 3.4 EV/EBITDA (T+1) 5.2 9.6 3.2 EV/hl (USD) 119.0 214.5 131.9

Table 12 :Shareholders' List No of SharesHeineken Internatonal B.V. 205,740,000 40%Beleggingsmaatschappij Limba B.V 179,975,000 35%Other Shareholders 1,282,845,000 25%Total 1,668,560,000 100%Source: Company Records

Income Statement (RWFm) F2009 F2010 % ∆Revenue. 45,478 52,799 16.1%COS (26,730) (27,115) 1.4%Gross profit 18,749 25,684 37.0%Net finance charge (405) (128) -68.4%PBT 9,333 14,402 54.3%Attributable earnings 6,347 10,331 62.8%Balance Sheet (RWFm) F2009 F2010 % ∆Total Assets 37,086 38,685 4.3%NAV 15,200 16,094 5.9%Current Assets 19,909 20,127 1.1%Current Liabilities 20,987 21,749 3.6%Current ratio 0.95 0.93Cash flow (RWFm) F2009 F2010Operating activities 13,993 13,769Investing activities (5,220) (4,250)Financing activities (5,233) (9,596)

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BRALIRWA - 3 YEAR CGR COMPARISON

31 DECEMBER (RWFm) 2007 2008 2009 2010 2011F 2012F 3yr CAGR

Income StatementSales 33,679 42,709 45,478 52,799 61,774 72,276 16%COS (20,385) (26,683) (26,730) (27,115) (32,123) (37,583) 15%Gross Profit 13,293 16,026 18,749 25,684 29,652 34,692 19%GP Margin 39% 38% 41% 49% 48% 48%Distribution 2,973 4,480 5,336 6,449 6,578 6,710 34%Other expenses 1,650 322 693 315 329 344 -35%Admin 7,011 7,337 8,948 10,240 10,752 11,289 13%Total Operating Costs 11,634 12,139 14,977 17,004 17,659 18,343 13%Other Income 3,366 5,528 5,966 5,850 6,143 6,450 33%Depn and Amortisation 2,180 2,624 2,631 3,271 3,498 3,743 10%EBITDA 6,968 11,810 11,964 17,673 21,499 26,401 31%EBITDA Margin 21% 28% 26% 33% 35% 37%Interest Income/(expense) 236 229 405 128 134 141 31%Profit before Tax 4,789 9,186 9,333 14,402 18,001 22,658 40%Taxation (2,074) (2,774) (2,986) (4,071) (5,040) (6,344) 20%Profit after Tax 2,714 6,411 6,347 10,331 12,961 16,314 53%Minorities (1.41) (0.62) (0.19) (0.20) (0.23) (0.25) -64%Attributable Income 2,716 6,412 6,589 10,331 12,961 16,314 56%RatiosWeighted shares 514 514 514 514 514 514 EPS(RWF) 5.3 12.5 12.8 20.1 25.2 31.7 DPS (RWF) 9.9 12.3 20.1 25.2 31.7 NAV/share (RWF) 18.21 26.63 29.57 31.31 35.11 39.37 Production (m h/l) 1.20 1.25 1.21 1.25 1.40 1.45 Mkt Cap per h/l (US$) 127.3 122.7 126.0 122.2 109.2 105.4 Growth RatiosSales growth (%) 26.8% 6.5% 16.1% 17.0% 17.0%Opex growth (%) 4.3% 23.4% 13.5% 3.9% 3.9%PBT growth (%) 91.8% 1.6% 54.3% 25.0% 25.9%Earnings growth (%) 136.1% 2.8% 56.8% 25.5% 25.9%MarginsGross margin 39.5% 37.5% 41.2% 48.6% 48.0% 48.0%PBT margin 14.2% 21.5% 20.5% 27.3% 29.1% 31.3%Earnings Margin 8.1% 15.0% 14.5% 19.6% 21.0% 22.6%Effective Tax Rate 43.3% 30.2% 32.0% 28.3% 28.0% 28.0%EBITDA margin (%) 20.7% 27.7% 26.3% 33.5% 34.8% 36.5%

24

EAST AFRICAN BREWERIES LIMITED Regulations dampening prospects... Kenya’s production of beer continues to be well ahead of all the other countries in the East African region. East African Breweries Limited (EABL) is the largest brewer in East African, commanding about 90% of the beer market in Kenya, c30% in Tanzania and 48% in Uganda.

The Serengeti deal should drive earnings in FY 2011. EABL acquired a majority stake in Serengeti Breweries Limited (SBL) in September 2010. As Tanzania’s second-largest brewer, SBL produces the popular, premium Serengeti Lager (40,000hl capacity). We expect EABL to consolidate Serengeti’s results in H2 2011 and this should drive group revenue higher. In addition, Tanzania as a country has stronger growth prospects than most East African states (increasing population, growing middle class and affluence) and we should see Tanzanian operations’ contribution to revenue overtaking that of Uganda in the next three years. In addition, prospects in Southern Sudan also provide significant expansion opportunities.

Moving away from barley usage to “drought

resistant” sorghum. Kenya is currently experiencing a drought and there are expectations that rains will be below expectations, hurting barley production. The company rolled out a large-scale sorghum production exercise in Kenya and Uganda. This exercise is expected to reduce barley reliance to 60% and increase sorghum input to 40%, thereby translating to cost advantages.

The Alcoholic Drinks Control Act is the major dampener. While EABL is a clear favourite on a sample of SSA breweries at an EV/hl of USD 215/hl, the impact of this Act will be in the form of a slow down in sales in FY 2012. HOLD.

BLOOMBERG: EABL:KN HOLDCurrent Price (KES) 208.00 Current Price (USD) 2.42 Target Price (KES) 251.89 Target Price (USD) 2.93 Upside/ Downside 21.1%LiquidityMarket Cap (KESm) 164,481 Market Cap (USDm) 1,916

Shares (m) 790.8 Free Float 50%Ave. Daily vol ('000) 174 Share Price Performance6 Months (KES) -1.9%Relative change (%)* -1.2%12 Months (KES) 21.6%Relative change (%)* 15.2%*Relative to MSCI Frontier Market Index

Financials (KESm)-FY 30 June 2010 2011F 2012FTurnover 37,965 41,987 46,185 EBITDA 13,539 15,815 17,424 Attributable earnings 7,179 9,728 10,836 EPS (KES) 9.1 12.3 13.7DPS (KES) 8.8 9.2 10.3 NAV/share (KES) 26.3 31.9 35.3 Ratios 2010 2011F 2012FGearing 0.0% 0.0% 0.0%RoaA 19.7% 24.2% 24.8%RoaE 35.4% 42.3% 40.8%EV/EBITDA 11.6 9.6 8.5 EV/hl (USD) 214.5 195.3 177.1 PBV (x) 7.9 6.5 5.9 PER (x) 22.9 16.9 15.2 Earnings Yield 4.4% 5.9% 6.6%Dividend Yield 4.2% 4.4% 4.9%EBITDA margin 35.7% 37.7% 37.7%

EQUITY RESEARCH

KENYA

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EABL: Price Vs Volume

Volume Traded-RHS Price (KES)-LHS

STRENGTHS WEAKNESSESNil gearing Fiscal constraintsSupply optimisation and cost leadership Cost inflationary pressuresStrong regional presence Heavily taxed products relative to peersDiverse product portfolio that suits different market segmentsReduced reliance on barley through use of sorghum to lower production costsOPPORTUNITIES THREATSFurther regional expansion-Ethiopia Excise duty increasesSpirits opportunity Drought threats in KenyaGrowing middle class population High oil/ energy pricesHarmonisation of tax regimes in Kenya Competition-SABMillers' competitive as a result of an intergration of EAC aspirations in Kenyaeconomies Weakening of KESPrivatisation of breweries in East Africa

25

Nature of Business EABL is East Africa's leading branded alcohol beverage business and has an outstanding collection of beer and spirits brands. Its main operations are in Kenya and it also has a footprint in Uganda and Tanzania, while exporting its products to Rwanda, Burundi and Southern Sudan. With breweries, distilleries, support industries and a distribution network across the region, the group's diversity is an important factor in delivering the highest quality brands to East African consumers. Core brands include the country's leading brand – Tusker (the flagship brand and a Kenyan icon). Other members of the EABL Kenya family include: Tusker Malt, Pilsner, White Cap, White Cap Light, Senator, Guinness, Allsopps, President and the latest addition, Windhoek lager. H1 2011 Financial Results Overview Revenues for the half year were 9.9% ahead of H1 2010 at KES 20.46bn (USD 243.6m), with the Kenyan operations contributing 75% to total revenues. The gross profit was KES 10.6bn, implying a GP margin of 52% (H1 2010: 49.5%). This was largely a result of a 12% volume increase as opposed to price increases. The operating profit improved by 14.5% to KES 6.12bn (OP margin of 29.9%). Earnings declined 8.7% as a result of a higher tax charge of 32.7% versus 29.3% in H1 2010, and the fact that associate income from Tanzania Breweries (TBL) was not included in H1 2011 results. EABL still owns 20% of TBL but has indicated its intentions to sell its stake in the future. The group declared an interim dividend of KES 2.5 per share (total payout of KES 2.0bn), which is the same amount paid out in H1 2010. On the balance sheet, total assets were up 10% to KES 42.21bn, as a result of a 2.80% growth in current assets (these include EABL’s 20% stake in TBL as it was classified as an asset held for sale). Operational Review Regulations limiting market place wins. The effect of the Alcoholic Drinks Control Act could limit growth in the key Kenyan market in FY 2011. Under the new Act, the NACADA Authority has the mandate to enforce laws that control the production, manufacture, sale, labelling, promotion, sponsorship and consumption of alcoholic drinks with the intent of protecting consumers and avoiding irresponsible drinking. The law restricts the hours within which the sale of alcoholic drinks is permitted. We expect the full impact of this Act to be reflected in FY 2012 in the form of a slow down in sales and by extension, profits. Capex to remain a priority. EABL has embarked on a number of capex investments including a new packaging line in Uganda, and increased water storage facilities. Current production volumes are around 8.5m hl. The refurbishment to the Malting plant was undertaken so as to improve efficiencies and guarantee malt quality. Outlook Focus on premium spirits and beer. In H1 2011, spirits volumes rebounded significantly, supported by tax reprieves and price increases of premium/mainstream brands. The group’s strategy will focus on brand building and market development initiatives which should drive future growth. Valuation and Recommendation Generally, most states in the East Africa region are expected to register GDP growth rates of c5% in 2011. However, we expect moderate sales growth for EABL, given the impact of the Alcoholic Drinks Control Act. HOLD

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Beer Production (mhl)-RHS Capex (KES bn)-LHSSource: IAS

Table 14: Top 5 Shareholder's ListDiageo Kenya Limited 42.82%Diageo Holdings Netherlands BV 4.55%Board of Trustees NSSF Board 4.55%Guinness Overseas Ltd 2.61%CFC Stanbic Nominees 2.37%Source: IAS

Income Statement (KESm) H1 2010 H1 2011 % ∆Turnover 18,617 20,463 9.9%COS (9,396) (9,851) 4.8%Gross profit 9,221 10,612 15.1%Operating Profit 5,342 6,115 14.5%Net finance charge 144 50 -65.3%Attributable earnings 3,491 3,189 -8.7%

HEPS (Shs) 4.41 4.03 -8.6%Balance Sheet (KESm) F2010 H1 2011 % ∆Total Assets 38,420 42,209 9.9%NAV 23,953 21,727 -9.3%Current Assets 17,456 17,937 2.8%Current Liabilities 11,684 17,695 51.4%Current ratio 1.49 1.01Cash flow (KESm) H1 2010 H1 2011Operating activities 8,121 6,165Investing activities (1,137) (6,900)Financing activities (5,353) (4,601)


26

EABL- 5 YEAR CGR COMPARISON

30 JUNE (KESm) 2005 2006 2007 2008 2009 2010 2011F 2012F 5yr CAGR

Income StatementSales 19,186 20,907 25,871 32,488 34,408 37,965 41,987 46,185 15%COS (6,296) (7,896) (11,610) (15,007) (17,561) (18,823) (20,643) (22,708) 24%Gross Profit 12,890 13,011 14,260 17,481 16,846 19,142 21,343 23,478 8%Operational Expenses 'excluding D&A' (4,580) (4,451) (4,019) (5,338) (4,709) (5,603) (5,528) (6,053) 4%EBITDA 8,310 8,560 10,241 12,144 12,138 13,539 15,815 17,424 10%Depreciation and Amortization (814) (627) (766) (1,260) (1,581) (2,283) (1,704) (1,794) 23%Operating Profit 7,496 7,933 9,474 10,884 10,557 11,256 14,111 15,630 8%Net Finance Income/ (Cost) 29 342 495 624 493 168 651 838 42%

Profit before Tax 8,223 8,577 10,636 12,316 11,507 12,568 15,991 17,820 9%Taxation (2,447) (2,167) (3,107) (3,132) (3,244) (3,731) (4,547) (5,072) 9%Profit After Tax 5,776 6,410 7,529 9,184 8,262 8,838 11,444 12,748 9%RatiosWeighted shares (m) 659.0 659.0 659.0 790.8 790.8 790.8 790.8 790.8EPS (KES) 6.0 6.8 7.8 9.6 8.7 9.1 12.3 13.7DPS (KES) 3.8 4.9 7.3 8.1 8.1 8.8 9.2 10.3Dividend Cover 1.6 1.4 1.1 1.2 1.1 1.0 1.3 1.3Dividend Yield 1.8% 2.4% 3.5% 3.9% 3.9% 4.2% 4.4% 4.9%Sales (m hl) 7.5 8.5 9.1 9.8EV/hl (USD) 245.3 214.5 195.3 177.1Growth RatiosSales growth 15.6% 9.0% 23.7% 25.6% 5.9% 10.3% 10.6% 10.0%EBITDA growth 23.1% 3.0% 19.6% 18.6% 0.0% 11.5% 16.8% 10.2%OP growth 24.6% 5.8% 19.4% 14.9% -3.0% 6.6% 25.4% 10.8%PBT growth 16.8% 4.3% 24.0% 15.8% -6.6% 9.2% 27.2% 11.4%NI growth 21.7% 11.0% 17.5% 22.0% -10.0% 7.0% 29.5% 11.4%MarginsGross margin 67.2% 62.2% 55.1% 53.8% 49.0% 50.4% 50.8% 50.8%Op margin 39.1% 37.9% 36.6% 33.5% 30.7% 29.6% 33.6% 33.8%PBT margin 30.1% 30.7% 29.1% 28.3% 24.0% 23.3% 27.3% 27.6%PAT margin 30.1% 30.7% 29.1% 28.3% 24.0% 23.3% 27.3% 27.6%Effective Tax Rate 29.8% 25.3% 29.2% 25.4% 28.2% 29.7% 28.4% 28.5%EBITDA margin 43.3% 40.9% 39.6% 37.4% 35.3% 35.7% 37.7% 37.7%

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TANZANIA BREWERIES LIMITED There is still some juice in the lemon… We believe the investment thesis in consumer stocks such as Tanzania Breweries Limited (TBL) warrants significant attention given the above-average GDP and population growth rates in the East African region in general.

In-house strategies bearing fruits. TBL has positioned itself through its SAIDIANA Project (launched in 2010). The project promotes barley growing and the development of a self sufficient malting industry in the Southern Highlands of Tanzania. In line with this initiative, 5,800t of sorghum has been contracted in different parts of the country. The winery development in Central Dodoma region where grapes produced by small scale farmers are used by Tanzania Distilleries in the production of Valeur brandy and Overmeer box wine also has similar benefits to TBL’s barley and sorghum initiatives.

EABL/Serengeti deal a threat to market share. The arrangement between TBL and East African Breweries Limited (EABL), which entailed both companies selling each other’s brands in their respective countries, was terminated in 2010. EABL acquired the company’s local rival Serengeti Breweries Limited (SBL) and now owns 51%. An erosion of TBL’s market share is expected as a result.

Attractive valuation but DSE regulations limit

exposure. TBL trades at a low PER multiple of 6.1x and its EV/hl of USD 132/hl is also attractive. However, foreign investors on the DSE are only allowed to invest up to 60% in aggregate of the share capital of any listed company. Furthermore, once invested there is a lock-in period of six months before a foreign investor is allowed to exit. Given SABMiller’s majority shareholding, the stock is only accessible to local investors. Nonetheless, we maintain that the stock is one of the best value plays in East Africa. BUY

EQUITY RESEARCH

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BLOOMBERG: TBL:TZ BUYCurrent price (TZS) 1,820 Current price (USD) 1.2 Target price (TZS) 2,650.0 Target price (USD) 1.7 Upside/downside 45.6%LiquidityMarket cap. (TZSm) 536,769.80 Market cap. (USDm) 353.49 Shares (m) 294.9 Free Float (%)Ave. Daily vol ('000) 16.4Share Price Performance6 Months (TZS) 2.2%Relative change (%)* 2.9%12 Months (TZS) 5.8%Relative change (%)* -0.6%*Relative to MSCI Frontier Market Index

Financials (TZSm)-FY 31 March 2010 2011F 2012FRevenue 527,768 614,786 676,264 Gross profit 254,242 272,878 300,166 Profit before tax 133,842 146,110 164,009 Profit after tax 92,449 100,816 113,166 EPS (TZS) 296.5 321.3 360.7 DPS (TZS) 150.0 162.6 182.5 NAV/share (TZS) 669.1 710.7 756.4 Ratios 2010 2011F 2012FGearing 50.4% 49.9% 49.3%RoaA 21.8% 19.6% 18.8%RoaE 48.8% 45.7% 48.3%EV/EBITDA 3.4 3.2 2.9 EV/hl 131.9 125.9 118.7PBV (x) 2.7 2.6 2.4 PER (x) 6.1 5.7 5.0 Earnings Yield 16.3% 17.7% 19.8%Dividend Yield 8.2% 8.9% 10.0%EBITDA margin 31.8% 29.4% 29.4%

STRENGTHS WEAKNESSESSignificant market share of c80% Exposure to commodity price shocks can Synergies from parent company; SAB Miller lead to a decline in operational efficiencyHas invested significantly to expand capacity DSE regulations limit exposure for foreignersWide distribution networkTraining and development programs providedby SABMiller ensure best practicesWide brewery footprint in TanzaniaOPPORTUNITIES THREATSRising per capita consumption in DroughtTanzania as a result of economic growth Competition for Serengeti Breweries/EABLNew markets in EAC states Infrastructural constraints relating toExports to Southern Sudan, Uganda, Burundi, power shortagesRwanda and Kenya TZS weaknessRural penetration

28

Nature of Operations The company’s principal activities are the production, distribution and sale of malt beer and alcoholic fruit beverages (AFB’s) in Tanzania. It operates breweries in Dar es Salaam, Arusha, Mwanza and Mbeya and thirteen depots throughout the country. It also produces malt at its malting plant in Moshi. The company owns and manages Tanzania Distilleries Limited (65%), a spirit liquor company that commands about 95% of the spirits market share in Tanzania. TBL’s brands include Safari Lager, Kilimanjaro Premium Lager, Ndovu Special Malt and Konyagi. The company also produces and distributes Castle Lager, Castle, Milk Stout, Castle Lite and Redds Premium under licence from SABMiller. Tanzania Distilleries Limited also distributes Amarula and various other international brands of wines and spirits under licence from Distell of South Africa. TBL has consistently maintained a record of annual growth in profit since 1998 and has a production capacity of about 3.0m hl. The company has a total of 14 Distributors, 180 distribution centers, 10,000 retail outlets serviced and a sales force team of about 125 individuals H1 2011 Financial Results Overview TBL posted a strong performance for the six months ended 30 September 2010. Revenue was up 16.7% to TZS 292.8bn (USD 192.8m), with clear beer contributing about 85%. The increase was a direct result of gains in market share and an improved product mix. While gross profit was 12.0% ahead of H1 2010, the GP margin eased from 47% to 45%. The EBITDA margin also declined marginally from 25% to 24%. A significant rise in fuel prices adversely affected distribution costs, leading to lower margins. Overall, a profit of TZS 38.8bn was registered, representing 0.4% growth on H1 2010. Operational Review Increased marketing efforts to counter competition. TBL continues to focus on brand innovation. Castle Lite was launched in a new 375ml green bottle, complementing Ndovu Special Malt in the premium category which continues to reflect volume performance well above expectation. Safari Lager benefited from the national rollout of the long neck 500ml returnable bottle. Grand Malt, a non-alcoholic malt drink launched in April 2010, has also resonated well with consumers. In its FY 2011 results, SABMiller indicated that lager volumes in Tanzania grew by 5% for the full year. Prior year volumes included licensed brand production for East African Breweries Limited (EABL) – however, if the impact of these volumes are excluded, lager brands grew 19% in the year, with the total beverage portfolio up 23%. Capex projects remain a priority. The company continues to embark on expansion and facility upgrade programmes required to meet anticipated market growth. In H1 2011, a total of TZS 29.0bn was invested, with an additional TZS 22.0bn still to be spent in H2 2011. Outlook New brewery to open up new opportunities. The new brewery in Mbeya, which was successfully commissioned during H1 2011, allowed the group to substantially reduce distribution costs in the southwest region. The brewery is also expected to grow market share as it opens up new market opportunities in the southwest region. Exploring new opportunities in EAC. TBL is looking into the possibility of expanding its beer market to all East African Community (EAC) member states and beyond. TBL is also planning to launch a variety of its new brands and also strengthen the current brands so as make them even more competitive in the beer industry. Valuation and Recommendation TBL is one of our preferred East African consumer plays. An EV/hl of USD 132/hl represents a 39% discount on EABL’s EV/hl of USD 215/hl. Forward ratings (PER and PBV) are also undemanding relative to its peers. We have assigned equal weighting to our valuation techniques and derived a target price of TZS 2,650 per share. BUY.

Clear Beer, 87.7%

Wines and Spirits, 12.3%

Fig 32: F2010 Revenue Split

Source:IAS

Table 16: Top 5 Shareholders' ListSAB Miller Africa BV 52.8%East African Breweries Limited 20.0%Unit Trust of Tanzania 4.5%United Republic of Tanzania 4.0%International Finance Corporation 3.8%Source:IAS

Income Statement (TZSm) H1 2010 H1 2011 % Δ

Turnover 250,761 292,755 16.7%COS (133,457) (161,433) 21.0%Gross profit 117,304 131,322 12.0%Operating Profit 63,571 70,087 10.2%Finance costs (4,521) (9,785) 116.4%Attributable earnings 38,619 38,771 0.4%EPS (TZS) 130.90 131.50 0.5%Balance Sheet (TZSm) H1 2010 H1 2011 % Δ

Total Assets 412,318 465,427 12.9%NAV 175,059 236,122 34.9%Current Assets 124,199 119,756 -3.6%Current Liabilities 223,094 143,931 -35.5%Current ratio 0.56 0.83Cash flow (TZSm) H1 2010 H1 2011Operating activities 16,685 83,235Investing activities (57,592) (28,910)Financing activities 35,780 6,098


29

TANZANIA BREWERIES - 5 YEAR CGR COMPARISON

31 MARCH (TZSm) 2005 2006 2007 2008 2009 2010 2011F 2012F 5yr CAGR

Income StatementRevenue 229,644 260,628 314,878 383,181 464,199 527,768 614,786 676,264 18%Cost of Sales (205,722) (264,157) (273,526) (341,908) (376,098)Gross Profit 177,459 200,042 254,242 272,878 300,166EBITDA 126,506 138,734 167,849 180,491 198,785D&A 13,794 13,414 21,904 21,794 21,686Operating profit 112,712 125,320 145,945 158,697 177,099Finance costs-net (3,544) (10,070) (12,103) (12,587) (13,091)Share of loss from associate - (62) - - - Profit before tax 69,332 85,584 95,603 109,168 115,188 133,842 146,110 164,009 14%Income tax (34,973) (34,391) (41,393) (45,294) (50,843)Profit After Tax 74,195 80,797 92,449 100,816 113,166RatiosWeighted shares 295 295 295 295 295 295 295 295EPS (TZS) 157 193 209 242 262 297 321 361DPS (TZS) 190 177 200 200 150 150 163 182NAV (TZS) 411 523 669 711 756Dividend Cover 0.8 1.1 1.0 1.2 1.7 2.0 2.0 2.0 Dividend Yield 10.4% 9.7% 11.0% 11.0% 8.2% 8.2% 8.9% 10.0%

Growth RatiosSales growth 13.5% 20.8% 21.7% 21.1% 13.7% 16.5% 10.0%EBITDA growth 9.7% 21.0% 7.5% 10.1%OP growth 11.2% 16.5% 8.7% 11.6%PBT growth 23.4% 11.7% 14.2% 5.5% 16.2% 9.2% 12.3%Earnings growth 22.9% 8.3% 15.9% 8.0% 13.3% 8.4% 12.3%MarginsGP margin 46.3% 43.1% 48.2% 44.4% 44.4%EBITDA margin 33.0% 29.9% 31.8% 29.4% 29.4%PBT margin 30.2% 32.8% 30.4% 28.5% 24.8% 25.4% 23.8% 24.3%Earnings margin 20.2% 21.8% 19.6% 18.6% 16.6% 16.6% 15.4% 15.7%

30

Southern Africa Industry Overview From a broader perspective, the Southern African region is experiencing positive growth on the back of various macro- economic factors. It is worth noting that Southern Africa (ex South Africa) has the highest concentration of brewers that are either associates or subsidiaries of SABMiller. The global brewer has ramped up capital investment and expenditures in Africa with over USD 1.5bn invested in Africa over the last few years. The Zambian economy for example posted a real GDP growth rate of around 7.1% in 2010, marking twelve consecutive years of positive GDP growth averaging 5.1% per annum over the period. The recovery in global trade and strong demand for commodities from India, China and Brazil has supported the metal prices. On another note, Zambia has experienced bumper maize production in the agricultural sector at 2.8m metric tonnes as well as increased production from NTE’s (non-traditional exports), mainly tobacco, sugar and cotton. In Zimbabwe, economic stabilisation has led to a recovery in personal disposable incomes. Despite various political constraints, good growth is expected to be registered in the consumer, mining and agricultural sectors in 2011. The Ministry of Finance estimates GDP growth 9.3%. Namibia’s economy is largely hinged on the global commodity cycle as it is heavily dependent on the extraction and processing of minerals for export. Mining accounts for 8.0% of GDP, but provides more than 50% of foreign exchange earnings. Rich alluvial diamond deposits make Namibia a primary source for gem-quality diamonds. As the global economy recovers, the Namibian economy should benefit accordingly. In 2011, we expect growth to accelerate to c4.0% as the global economic recovery gains momentum. Botswana is also commodity-driven given its vast resource base that includes diamonds. Generally, Botswana is not a consumer play, largely due to the fact that the country has one of the smallest populations in Africa. Nonetheless, Botswana has a high per capita GDP of close to USD 7,100 (only outdone by Mauritius in SSA), indicating advanced levels of buying power. Overall, the positive economic outlook in Southern Africa coupled by low alcohol per capita consumption levels of about 12 litres pp is supportive of the consumer sector. However, the major constraints in the region relate to;

Inadequate power and high energy costs; Weak consumer credit markets in countries such as

Zimbabwe; and Stiff regulations (levies and duties) in countries such

as Botswana (Sechaba). Government policies are largely earmarked on eliminating alcohols consumption levels.

Comment on valuation and pricing Generally, ratings for brewers in Southern Africa are undemanding given an average EV/hl of about USD 117/hl versus USD 372/hl for West Africa. Zimbabwe’s Delta Corporation is the largest, with a total capacity of about 8.5m hl. Based on EV/hl, Nambrew is one of the cheapest at USD 88/hl. On the other hand, Natbrew has a significantly lower EV/hl given the fact that it focuses entirely on opaque beer (a high volume and low margin product).

Table 18 Delta Nambrew Natbrew Phoenix Sechaba ZambrewEBITDA Margin 20.0% 18.0% 15.6% 17.1% 23.0% 12.4%RoaE 25.3% 25.9% 133.1% 7.9% 89.6% 22.6%RoaA 17.6% 11.0% 46.6% 5.5% 36.5% 4.4%PER (Hist) 17.8 9.9 14.2 20.8 12.6 21.3PER(T+1) 12.7 8.9 13.0 18.5 15.8 15.7PBV (Hist) 4.5 2.4 16.3 1.6 6.1 4.6PBV(T+1) 3.5 1.9 15.3 1.4 6.1 4.4EV/EBITDA (Hist) 11.8 5.4 9.1 6.1 5.3 11.5EV/EBITDA (T+1) 7.8 5.1 9.0 5.5 6.8 9.8EV/hl (USD) 166.2 87.8 55.0 102.3 102.2 188.8

Fig 34: Exchange Rate ZMK Vs USD

Fig 33: Exchange Rate BWP Vs USD

Fig 35: Exchange Rate NAD Vs USD

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31

AFRICAN DISTILLERS LIMITED Being held hostage by duty regimes……. African Distillers Limited (Afdis) is a market leader in Zimbabwe in terms of wines and spirits. It sells imported alcoholic beverages at competitive prices and also produces a range of brown spirits (whisky, brandy, and golden rum) and white spirits (gin, rum, vodka and ouzo). The company has about 22 stockists that ensure a first class distribution service.

Duty disadvantages had hit profitability. Afdis reported losses in FY 2010 mainly as a result of shrinking margins that came about as a result of the doubling of ad valorem excise duty from 20% to 40% in January 2010. In addition, the excise regime led to an increase in the volume of imported products at the expense of local products because of the duty advantage (imported products were levied at cost price whilst local products were levied at ex-factory selling prices).

A move to specific duty to revive viability. As a

result of the change in duty from ad valorem to specific in August 2010, the viability of local spirits production has been restored. Local production is now steadily increasing, fuelled by a dollarised environment.

A good candidate for long term investors. We note

that consumer stocks are under the radar of most investors given the upside that can come as a result of a recovery in personal disposable incomes. GDP per capita of USD 438 pp in Zimbabwe is relatively low, suggesting solid growth potential off a low base. Our FY 2012 estimates places the counter on a PER (T+2) of 5.9x. Our target price of US 19c represents 58% potential upside. BUY

BLOOMBERG: AFDIS:ZH BUYCurrent price (USD) 0.12Target price (USD) 0.19Upside/Downside (%) 58.3%Liquidity Market Cap (USDm) 11.4Shares (m) 95.2Free float (%) 22.3Ave. daily vol ('000) 20.6Share price performance6 Months (%) -16%Relative change (%)* -15%12 Months (%) -20%Relative change (%)* -26%*Relative to MSCI Frontier Market Index

Financials (USDm)-FY 31 March 2010 2011F 2012FNet Income 12.1 17.6 24.5 EBITDA (2.2) 0.2 2.9 Attributable earnings (1.5) (0.1) 1.9 EPS (USc) (1.6) (0.1) 2.0 DPS (USc) - - - NAV/share (USc) 5.0 5.0 7.0Ratios 2010 2011F 2012FGearing (%) 11.4% 2.7% naRoaA (%) -15.1% -0.5% 12.5%RoaE (%) -27.7% -1.4% 33.8%EV/EBITDA (x) (5.3) 48.1 4.1EV/hl (USD) 230.2 227.9 151.9EV/Sales 1.0 0.7 0.5PBV (x) 2.4 2.4 1.7PER (x) na na 5.9Earnings Yield (%) 0.0% 0.0% 16.8%Dividend Yield 0.0% 0.0% 0.0%EBITDA margin (%) -18.6% 1.4% 12.0%

EQUITY RESEARCH

ZIMBABWE

MAY 2011


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Afdis: Price Vs Volume

Volume Traded-RHS Price (USc)-LHS

STRENGTHS WEAKNESSESQuality branded products Cash contraints limit capex projectsWide distribution network Weak macro-economyBrand & technical support from PartnerDistell South Africa

OPPORTUNITIES THREATSStabilising economy Increase in excise taxesRecovery in public finances More aggressive competitionAid inflows Frequent energy disruptionsUnutilised capacity-wine production

32

Nature of Business African Distillers Limited manufactures and imports branded wines and spirits for local supply. The company was established in April 1944 as P J Joubert (Bulawayo) Limited. Its name was changed to African Distillers (Rhodesia) Limited in 1946. Currently, annual sales are in the region of 5.0m litres, of which 36% is locally produced whilst the balance is imported. However, we expect sales volumes to increase to about 8.0m litres in 2012. H1 2011 Financial Results Overview While gross sales were up from USD 8.7m in H1 2010 to USD 10.27m, the lingering effect of ad valorem duty impacted on Afdis’s Q1 2011 performance and volumes declined 7.0%. However, volumes recovered in Q2 2011 as duty was changed from ad valorem to specific in August 2010. As a result, net sales grew 8.0% to USD 7.9m y-o-y. Gross margins eased slightly to 32.2% from 33.6% due to strong volume growth of lower priced products. The company incurred retrenchment costs of USD 0.5m with the benefits of the restructuring expected to accrue in the H2 2011 as pay roll costs are expected to decline by 45%. A net exchange loss of USD 0.4m was also recorded. Overall, a loss for the period of USD 0.78m was registered. Cash generation improved with the company generating USD 0.7m from operating activities (H1:2010; USD 0.07m). Operational Review Building on core competencies…Spirits. Afdis has moved away from local wine production and is building on its core business of producing spirits. Currently, the company imports about 95% of its wines and only produces small quantities locally in brands such as Green Valley and Montello, mainly for distilling purposes. Generally it is cheaper to import wines from South Africa given prices of about ZAR 3.0 per litre, compared to USD 1.0 per litre charged by wine suppliers in Zimbabwe. Through partners such as Distell in South Africa, the company imports wines such as Nederberg, Zonnebloem, and JC Le Roux. Afdis is also importing ciders (Savannah and Hunters) for sale to the local market. Regaining market share. Given the fact that the advantages of ad valorem duties enjoyed by small manufacturers producing cheap cane spirits have disappeared, Afdis is now regaining market share in the spirits mass market. Management estimates that the company’s market share has increased to approximately 40% from about 10% in 2009. However, the group remains dominant in the premium segment with a market share of over 80%. Given the stiff competition in the mass market, Afdis has introduced new packaging in PET bottles for this segment. The PET packaging (in 200ml PETs) is approximately 60% cheaper than glass and is available locally. This will result in packaging costs declining to approximately 17% of unit cost from 31%. Outlook It’s a volumes game too. The company plans to revamp its production facilities and upgrade its fleet. Management anticipates volumes will grow by a CAGR of 39% to 9.6m litres in FY 2013. In addition, increased volumes will allow for competitive pricing as efficiencies improve. We believe Afdis has solid opportunities to expand the operating margin through both the gross margin and managing its fixed expenses. The gross margin should increase and settle around 40%. Management targets PBT margins of between 10% and 12%. Valuation and Recommendation Afdis is a typical small cap company that could “excite’ and grow fast in its market. Our FY 2012 estimates place the counter on a PER (T+2) of 5.9x. Our target price of US 19c represents 58% potential upside. BUY

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Table 19: Top 5 Shareholders' List.Afdis Holdings 56.8%Old Mutual Life Assurance 12.3%Old Mutual Zimbabwe Ltd 3.0%Mining Industry Pension Fund 2.2%Mining Industry Pension Fund 2.2%Source:IES

Income Statement (US$'000) H1 2010 H1 2011 % Δ

Turnover 7,371 7,963 8.0%Excise duty (1,290) (2,305) 78.7%Gross profit 2,480 2,565 3.4%EBITDA 396 (476)Net finance charge (15) (30)Attributable earnings 402 (773)HEPS (USc) 0.42 (0.80)Balance Sheet (US$'000) H1 2010 H1 2011 % Δ

Total Assets 12,598 12,733 1.1%NAV 6,715 4,004 -40.4%Current Assets 7,866 8,133 3.4%Current Liabilities 4,851 8,094 66.8%Current ratio 1.62 1.00Cash flow (US$'000) H1 2010 H1 2011Operating activities (68.8) 733.9Investing activities (5.1) 0.7Financing activities 620.9 (301.0)

33

AFDIS - 5 YEAR CGR COMPARISON

31 MARCH (USDm) 2005 2006 2007 2008 2009 2010 2011F 2012F 5yr CAGR Balance Sheet

Shareholders' equity 5.5 1.5 0.2 0.5 6.3 4.8 4.7 6.6 -3%Minority interests - - - - - - - - Total shareholders' equity 5.5 1.5 0.3 0.5 7.8 5.3 5.2 7.1 -1%Interest Bearing Debt - - - 0.0 0.1 0.8 0.6 0.7 Trade creditors 0.3 0.9 0.1 1.8 0.6 3.9 5.9 7.4 64%Current Liabilities 2.6 2.0 0.2 2.0 1.0 5.5 7.5 9.5 16%Total Liabilities and equity 8.1 3.5 0.5 2.6 8.8 11.6 13.4 17.2 7%Fixed Assets 1.0 0.2 0.1 0.0 5.0 4.7 5.0 5.6 37%Investments 0.5 0.2 0.0 0.1 - - - - Stock - Trade net 3.1 1.4 0.3 0.6 3.0 4.7 4.9 6.7 9%Debtors 1.7 1.3 0.3 0.7 0.7 1.9 2.7 3.8 2%Cash at bank 1.2 0.4 0.1 1.2 0.1 0.2 0.5 0.8 -30%Current Assets 6.6 3.1 0.7 2.5 3.8 6.8 8.4 11.8 1%Total Assets 8.1 3.5 0.8 2.6 8.8 11.6 13.4 17.4 7%Income StatementTurnover 20.8 12.5 8.3 1.3 6.3 12.1 17.6 24.5 -10%EBITDA 11.0 6.9 4.0 0.6 5.2 (2.2) 0.2 2.9 -173%Associate income - - - - - - - - Profit before Tax 11.9 7.2 3.9 0.6 4.7 (2.5) (0.1) 2.6 -173%Taxation 3.1 1.6 1.2 0.2 1.5 (0.9) (0.0) 0.6 -179%Profit after Tax 8.8 5.6 2.7 0.4 3.2 (1.5) (0.1) 1.9 -171%Minorities - - - - - - - - Attributable Income 8.8 5.6 2.7 0.4 3.2 (1.5) (0.1) 1.9 -171%RatiosWeighted sharesEPS (USc) 9.2 5.9 2.8 0.4 3.4 (1.6) (0.1) 2.0Cash EPS (USc) 9.4 5.9 2.8 0.4 4.7 (2.3) 0.2 2.3DPS (USc) 1.3 0.0 0.7 0.1 0.0 0.0 0.0 0.0NAV per share (USc) 5.7 1.6 0.3 0.5 6.6 5.0 5.0 7.0Dividend Yield (%) 10% 0.0% 5.4% 0.8% 0.0% 0.0% 0.0% 0.0%

Growth RatiosSales growth -1.1% -39.8% -33.7% -84.3% 380.9% 92.8% 46.3% 39.0%Pre-interest profit growth 17.4% 37.0% -42.1% -85.9% 616.2% -162.5%Earnings growth 53.0% 36.0% 52.4% -85.6% 739.7% -147.5%

MarginsGross margin incl finance chgs 66.3% 65.0% 85.0% 94.7% 24.3% 35.3% 37.9%EBITDA margin 52.8% 54.8% 47.7% 43.0% 83.7% -18.6% 1.4% 45.0%Pre-interest margin 52.2% 54.6% 47.7% 43.0% 64.0% -20.7% -0.2% 10.7%Interest cover (times) n/a n/a 256.0% n/a n/a -51.5% -0.5% 42.2%Pre-tax profit margin 57.0% 57.4% 46.7% 43.2% 75.1% -20.5% -0.5% 10.4%

which may not reflect a true account due to variability of exchange rates during that period.*Note: Financial figures for 2005 to 2009 were derived using the Old Mutual Implied Rate (OMIR),

34

DELTA CORPORATION LIMITED The momentum continues…

We contend that Delta remains strategically positioned to benefit from the longer term growth opportunities emanating from increasing alcohol consumption levels driven by improved disposable incomes in Zimbabwe. Capitalised at about USD 940.0m, Delta constitutes about 21% of the entire ZSE market capitalisation. We believe there is a powerful strategic logic for investors to track the growth prospects in Zimbabwe through a direct exposure in the company.

A dominant industry player. Delta has regained

market share and now commands approximately 96% of the beer market from a low of 55% during 2008 and CSD market share is estimated at over 90%. In addition, there is still head room for volume growth given Delta’s installed capacity of 8.5m hl versus current production levels of 5.8m hl. In terms of volumes, Delta is the biggest operation in SABMiller’s Africa portfolio

Up-trading may affect sorghum beer. Generally, volume growth in sorghum beer declines when lager volumes are increasing on the back of rising disposable incomes as consumers trade up and vice-versa. As the economy grows, it is expected that lager volumes will grow more quickly than sorghum beer volumes and in the longer term sorghum volumes are expected to decline.

Attractive on a Sub Saharan Africa “scale”. Delta’s

ratings (PER and EV/EBITDA) are demanding relative to its Southern African peers. In addition, an EV/hl of USD 170/hl is above the Southern African average of USD 117/hl. However, on a relative comparative matrix that includes peers such as EABL and Nigerian Breweries, Delta is cheaper. We still see further scope for share-price appreciation. BUY

BLOOMBERG: DELTA:ZH BUYCurrent price (USD) 0.80Target price (USD) 1.00Upside/Downside 25.0%Liquidity Market Cap (USDm) 941.5Shares (m) 1,177

Free float (%) 32.0Ave. daily vol ('000) 519.6Share Price Performance6 Months (%) 33.3%Relative change (%)* 34%12 Months (%) 82%Relative change (%)* 75%*Relative to MSCI Frontier Market Index

Financials (USDm)-FY 31 March 2011 2012F 2013FRevenue 408.0 469.4 539.8EBITDA 81.7 123.0 170.3Attributable earnings 53.0 74.4 100.2EPS (USc) 4.5 6.3 8.5DPS (USc) 1.5 1.8 2.1NAV/share (USc) 17.6 22.9 29.6Ratios 2011 2012F 2013FGearing 10.3% 12.2% 11.9%RoaA 17.6% 19.0% 20.6%RoaE 25.3% 27.9% 29.5%EV/EBITDA (x) 11.8 7.8 5.7EV/hl (USD) 166.2 145.0 126.4PBV (x) 4.5 3.5 2.7PER (x) 17.8 12.7 9.4Earnings Yield 5.6% 7.9% 10.6%Dividend Yield 1.9% 2.2% 2.7%EBITDA Margin 20.0% 26.2% 31.6%

EQUITY RESEARCH

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Delta: Price Vs Volume

Volume Traded-RHS Price (USc)-LHS

STRENGTHS WEAKNESSESDominant position Low disposable incomesResurgent volumes Weak macro economyLeading brands, volumes increasing Frequent energy disruptionsExperienced management team

Diversified portfolio of products

OPPORTUNITIES THREATSStabilising economy Increase in excise taxesRecovery in public finances More aggressive competition from Growth in local premium brands importsCapacity expansion Disruptions to utilities (water & electricity)Resurging "night life" in major cities

35

Nature of Business Delta is the largest manufacturer, distributor and marketer of beverages in Zimbabwe. It was first listed on the stock exchange in 1946 as Rhodesian Breweries Limited and later changed its name to Delta Corporation in 1978. FY 2011 Financial Results Overview Delta posted a solid set of results registering double-digit growth across main income statement lines. Revenue grew 45% to USD 408.0m, ahead of FY 2010, and EBITDA was up 67% y-o-y to USD 81.7m. The main driver behind the results was a 15% growth in total volumes to 5.78m hl (lagers 1.61m hl, sorghum beer 2.91m hl, CSDs 1.2m hl). EBITDA margins improved to 20.0% from 17.3% in FY 2010. This was on the back of an improved product mix, reduced maintenance costs and improved supply chain management. An interest expense of USD 1.9m was paid as short term borrowings increased to USD 24.2m (USD 15.0m: FY 2010). Total assets grew 36% to USD 347.1m driven by capex for the year of USD 82.1m (Capex/EBITDA of approximately 1.0x). Cash generation was strong with USD 81.2m being generated from operations (approx. 80% of sales on a cash basis). However, free cash flow (FCF) was negative as a result of the relatively high capex. The company’s capex burden is however expected to ease given that the capex/turnover ratio is projected to move down from 17% to 12% in FY 2012 and 7.0% in FY 2013. Operational Review Supply side constraints expected to ease. The key constraints that affected company operations included high international commodity prices and rand/euro strength. The commissioning of new plants and more routine maintenance versus breakdown maintenance has led to cost savings. However, efforts have been made to mitigate against high import costs through new source markets such as India and Bahrain. The company has also managed to structure forward contracts for sugar to ensure steady supply. Outlook Volume growth trend expected to continue. Management asserts that for every percentage growth in GDP, the company’s volumes are leveraged at a factor of 2.5x. Management also highlighted that the company will be focusing on growth in the premium segment. Other initiatives will also include expanding its margins through cost effective procurement methods and investing in brands. Delta is forecasting overall volume growth of 15% in FY 2012, EBIT margins of 21% and EBIT growth of between 25% and 30%. Other beverage categories such as CSDs and water also exhibit a massive growth potential. In addition, with a reduced capex burden in the future, Delta is likely to offer attractive dividend payouts. April 2011 trading update encouraging. Trading numbers for April 2011 were ahead of budget given a revenue figure of USD 50.0m for the month. Moreover, overall volumes were 14% ahead of April 2010. It also appears that the new “maheu” business unit can potentially add USD 1.6m to group EBITDA in the near term. Valuation and Recommendation Delta is the largest brewer operating in Southern Africa (excluding South Africa) on the basis of production volumes (5.8m hl pa). We believe there is still headroom for Delta to improve its EBITDA margins in line with Southern Africa peers such as Sechaba (23.0%). On a mark to market basis, Delta’s ratings (PER and EV/EBITDA) are demanding relative to its Southern African peers. However, on a broader comparative matrix that includes peers of “relative clout” such as East Africa Breweries and Nigerian Breweries, Delta is cheaper. The average PER for these is around 20x, with an EV/EBITDA in the order of 11.x and EV/hl of USD 372/hl. We attach a 12- month target of USD 1.0, based on relative comparisons and a DCF valuation. BUY

6,153

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Fig 38: Actual & Projected Volumes (000 hl)

Lager Beer Soft Drinks Sorghum Total Beverages

Source: IES/Company Reports

Table 20: Top 5 Shareholder's ListSABMiller 15.1%Rainier Incorporated 18.4%Old Mutual Zimbabwe Ltd 15.0%Old Mutual Life Assurance 12.0%Stanbic Nominees 2.1%Source: IES


Income Statement (USDm) FY 2010 FY 2011 % Δ

Revenue 281.3 408.0 45%EBITDA 48.9 81.7 67%Net finance cost (0.8) (2.0) 152%Associates loss (0.6) 0.9 246%PBT 41.9 70.1 67%

Tax (2.2) (15.9) 628%Attributable Income 36.0 53.0 47%EPS (USc) 3.2 4.5 42%Balance Sheet (USDm) FY 2010 FY 2011 % Δ

Total Assets 255.0 347.1 36%NAV 159.2 207.9 31%Current Assets 81.6 99.4 22%Current Liabilities 70.3 112.7 60%Current ratio 1.2 0.9Cash flow (USDm) FY 2010 FY 2011Operating activities 21.7 81.2Investing activities (44.1) (86.8)Financing activities 27.1 9.4

36

DELTA - 5 YEAR CGR COMPARISON

31 MARCH (US$m) 2006 2007 2008 2009 2010 2011 2012F 2013F 5yr CAGR Balance Sheet

Shareholders' equity 23.1 8.1 10.0 110.0 159.2 207.9 270.5 349.8 55%Minority interests 2.3 1.2 1.6 8.4 2.7 3.8 5.1 7.2 10%Total shareholders' equity 27.5 10.1 13.5 155.7 184.7 234.4 298.4 379.8 54%Interest Bearing Debt 0.1 0.2 0.0 0.5 15.0 24.2 36.3 45.3 185%Trade creditors 21.3 8.0 10.4 22.8 36.3 88.5 103.4 109.4 33%Current Liabilities 23.3 8.0 10.4 25.2 55.3 88.5 103.4 109.4 31%Total Liabilities and equity 51.0 18.3 24.0 181.3 255.0 347.1 438.1 534.6 47%Fixed Assets 13.7 1.3 0.1 130.7 162.4 227.0 294.0 354.0 75%

Investments 5.0 0.6 0.6 11.5 11.0 20.7 21.8 22.9 33%Stock - Trade net 1.8 0.0 0.0 28.5 51.4 67.9 78.1 98.8 106%Debtors 4.3 14.5 18.5 4.6 14.3 26.4 30.3 38.4 43%Cash at bank 1.0 0.0 1.6 2.9 7.3 5.2 13.9 20.6 39%Current Assets 32.2 16.4 23.3 39.1 81.6 99.4 122.3 157.8 25%Total Assets 51.0 18.3 24.0 181.3 255.0 347.1 438.1 534.6 47%Income StatementTurnover 188.2 120.0 121.9 104.2 281.3 408.0 469.4 539.8 17%EBITDA 44.9 46.5 62.1 41.3 49.1 81.7 123.0 170.3 13%Associate income 1.1 1.0 0.6 -0.1 -0.6 0.9 1.0 1.7 -4%Profit before Tax 52.1 86.3 161.0 7.8 41.9 70.1 96.0 129.4 6%Taxation 13.4 25.8 49.0 2.4 2.2 15.9 20.2 27.2 4%Profit after Tax 38.7 60.6 112.0 5.4 39.7 54.1 75.8 102.3 7%Minorities 5.5 7.6 15.5 0.3 0.7 1.1 1.4 2.1 -27%Attributable Income 33.3 53.0 96.5 5.1 39.0 53.0 74.4 100.2 10%

EPS (USc) 2.8 4.5 8.2 0.4 3.3 4.5 6.3 8.5Cash EPS (USc) 3.0 4.9 10.7 2.9 3.4 5.6 8.4 11.7DPS (USc) 0.5 0.4 0.4 0.0 0.0 1.5 1.8 2.1NAV per share (USc) 2.0 0.7 0.8 9.3 13.5 17.6 22.9 29.6Dividend yield (%) 0.7 0.5 0.6 0.0 0.0 2.0 2.4 2.9

Growth RatiosSales growth (%) -43% -36% 2% -15% 170% 45% 67% 32%Pre-interest profit growth (%) -50% 5% 34% -80% 215% 76% 154% 94%Earnings growth (%) -49% 59% 82% -95% 665% 36% 91% 89%

MarginsGross margin incl finance chgs (%) 58.4 60.0 62.0 60.0 60.0 61.5 62.0 63.0EBITDA margin (%) 23.8 38.7 50.9 39.6 17.5 20.0 26.2 31.6Pre-interest margin (%) 23.5 38.7 50.9 11.8 13.8 16.7 21.0 24.5Interest cover (times) n/a n/a 8.6 2.7 49.5 34.4 27.2 29.2Pre-tax profit margin (%) 29.7 27.7 72.0 132.0 7.5 14.9 17.2 20.4

which may not reflect a true account due to variability of exchange rates during that period.*Note: Financial figures for 2006 to 2009 were derived using the Old Mutual Implied Rate (OMIR),

37

NATIONAL BREWERIES PLC ZAMBIA Another “Shake Shake” for the road… The Zambian economy is projected to record GDP growth of c6.5% in 2011, backed by a recovery in copper prices to cUSD 9,000/tonne and bullish copper production targets. We expect consumer names to benefit directly from increased domestic demand.

A perennial performer. Natbrew is a stable and consistent performer in the opaque beer business in Zambia, with a solid balance sheet and strong free cash-flows. In terms of sales, the company has consistently grown over the past 5 years, and it has financed virtually all capital expenditure from internal cash flows. As a result, the group has ably maintained a 100% dividend payout ratio whilst growing at a 5 year CGR of 8.0%. Natbrew clearly provides significant value for long term investors and is a low risk counter, with a good cash position and a high dividend yield of about 7.0%.

We expect out performance in FY 2011. While demand in 2011 is expected to be similar to that seen in 2010, lower maize costs owing to two successive bumper harvests in Zambia will reduce input costs and improve margins. Maize accounts for approximately 20% of the production cost. Kwacha appreciation, which seems likely in view of broader economic conditions, is also expected to improve margins.

An undisputed investment case. We like the company’s consistent dividend payout of 100% and dividend yield of c7.0%. Investors should cash in on this exciting story. Our DCF valuation method ascribes a target price of ZMK 9,906, indicating 43% potential upside. BUY

BLOOMBERG: NABR:ZL BUYCurrent Price (ZMK) 6,950 Current Price (USD) 1.46 Target Price (ZMK) 9,906 Target Price (USD) 2.08 Upside/Downside 42.5%LiquidityMarket Cap (ZMKm) 437,850 Market Cap (USDm) 92.0 Shares (m) 63.0 Free Float (%) 30.0 Ave. Daily vol ('000) 2.6 Share price performance6 Months (ZMK) 6.9%Relative change (%)* 7.5%12 Months (ZMK) 8.8%Relative change (%)* 2.4%*Relative to MSCI Frontier Market Index

Financials (ZMKm)-FY 31 March 2010 2011F 2012FTurnover 308,256 327,531 353,733 EBITDA 48,167 49,093 55,674 Attributable earnings 30,928 33,769 39,484 EPS (ZMK) 491 536 745 DPS (ZMK) 491 536 745 NAV/share (ZMK) 427 454 484 RatiosGearing 33% 35% 36%RoaA 47% 44% 56%RoaE 133% 122% 159%EV/EBITDA 9.1 9.0 6.6 EV/hl (USD) 55.0 52.0 49.2 PBV (x) 16.3 15.3 14.4 PER (x) 14.2 13.0 9.3 Earnings Yield 7.1% 7.7% 10.7%Dividend Yield 7.1% 7.7% 10.7%EBITDA margin 16% 15% 19%

EQUITY RESEARCH

ZAMBIA

MAY 2011


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Natbrew: Price Vs Volume

Volume Traded-RHS Price (ZMK)-LHS

STRENGTHS WEAKNESSESMarket leader locally Limited room for product Strong balance sheet diversificationStable raw materials supply as Inferior good- customers maya result of bamper harvests trade up the drnking curve inVast distribution network the event of an improvement in

disposable incomes

OPPORTUNITIES THREATSGood rainy seasons Closure of copper minesRising per capita consumption Weaker fiscal positionStrengthening of copper prices Weak Kwacha

Stiff competition locally

38

m

Nature of Operations Natbrew owns six opaque beer breweries in Zambia aimed at the lower end of the market. Natbrew was established in 1957 and its premier brands include Chibuku and Chibuku Shake Shake. Natbrew’s strategy of focusing on aggressive pricing and investment in the distribution network has enabled it to maintain its market share of c60%. In Zambia, this portion of the market has been growing steadily in line with the country’s much improved fiscal position following debt relief. Zambia is one of the countries that benefited most from the HIPC initiatives. In addition, recovering copper demand and prices and good rains will benefit the company in the long run. H1 2011 Financial Results Overview Natbrew posted a strong set of interims, registering a 19% growth in net revenues to ZMK 130.8bn (USD 27.8m). The increase was a result of a 22.25% increase in volumes that came about as a result of increased distribution activity and competitive pricing. PBT grew by 20.8% to ZMK 25.6bn (USD 5.4m), implying margins of 19.6%. The bumper maize harvest resulted in favourable maize prices, which together with a stronger ZMK on dollar priced inputs led to a reduction in costs. Overall, the net profit figure of ZMK 16.7bn was 20.8% ahead of H1 2010. As is the trend, 100% of all earnings were paid out, with dividends growing in line with net profits at 20.8%. The balance sheet grew by 17.1% to ZMK 99.2bn and the current ratio improved to 0.92x as a result of a 33% growth in current assets. Operational Review The business model remains a key competitive strength. Natbrew’s business model is a key competitive strength. The company has a stable, durable business model and is the envy of many companies in the region. It uses locally produced inputs, has a readily expandable capacity and the limited life of its product, together with its fleet distribution, provide a barrier to competitor entry. Signs of growth still evident. The opaque beer industry, with a large proportion of its customer base linked to “on the ground” economic activity, has grown both through positive economic times and slower periods. The Chibuku brand of traditional beer is one of the most identifiable in Southern Africa and has its origins in Zambia, dating back 50 years ago. In its FY 2011 results, SABMiller indicated that traditional beer volumes n Zambia grew by 11% as a result of improved distribution channels and availability. Outlook Building on capacity. Natbrew’s capacity utilisation is around 85%, thus there remains room to ramp up production without needing to incur any major capex. Volumes are forecast to increase to 1.8m hl from approximately 1.7m hl in 2010. With improved margins, some volume growth and a stable excise regime, we anticipate a solid improvement in earnings. Raw material costs to be contained. We expect the bumper agricultural season to filter through in Natbrew’s FY 2011 results, in the form of improved margins. For example, maize is anticipated to cost 20% less than in FY 2010. In addition, the impact of positive exchange rate movements on input costs should also lead to an improvement in margins. Valuation and Recommendation Natbrew is highly attractive on the basis of its dividend yield of 7.1% and strong core business. We expect Natbrew to outperform on the back of a solid recovery in the Zambian economy. Our DCF valuation method ascribes a target price of ZMK 9,906, indicating 43% potential upside. BUY

42%

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Fig 39: Natbrew : Turnover & PAT Trend

Net Turnover (ZMKm)-LHS PAT (ZMKm)-LHS PAT Growth-RHSSource: IAS

Table 22: Top 5 ShareholdersHeinerich Syndicate Limited 70.0%Barclays Lusaka Nominees 10.6%Public Service PF 8.2%National Pension Scheme Authority 2.22%Saturnia Regna Pension Trust Fund 2.08%Source: IAS


Income Statement (ZMKm) H1 2010 H1 2011 % ΔTurnover 152,342 187,411 23.0%Excise & VAT 38,993 51,707 32.6%Net Revenue 110,302 130,767 18.6%PBT 21,171 25,567 20.8%Tax (7,410) (8,949) 20.8%Profit after tax 13,761 16,618 20.8%EPS (ZMK) 218.4 263.8 20.8%DPS (ZMK) 218.4 263.8 20.8%Balance Sheet (ZMKm) F2010 H1 2011 % Δ

Total Assets 84,709 99,158 17.1%NAV 23,470 26,327 12.2%Current Assets 50,038 66,684 33.3%Current Liabilities 61,239 72,830 18.9%Current ratio 0.82 0.92

39

NATBREW- 4 YEAR CGR COMPARISON

31 MARCH (ZMKm) 2006 2007 2008 2009 2010 2011F 2012F 4yr CAGR

Income StatementTurnover 154,414 168,908 177,416 264,983 308,256 327,531 353,733 19%COS (91,626) (92,235) (100,036) (175,588) (199,478) (213,441) (229,927) 21%Gross Profit 62,788 76,673 77,380 89,395 108,778 114,090 123,807 15%GP Margin 41% 45% 44% 34% 35% 35% 35% -3%Distribution (6,007) (7,530) (8,058) (6,572) (3,899) (4,094) (4,299) -10%Other Income 1,749 211 719 1,693 2,567 2,824 2,852 10%Admin (23,976) (29,647) (52,446) (10,040) (12,718) (13,354) (14,022) -15%D & A 946Total operating costs (29,983) (37,177) (43,442) (53,574) (61,557) (62,173) (65,281) 20%EBITDA 36,434 39,707 33,711 36,598 48,167 49,093 55,674 7%

EBITDA Margin 24% 24% 19% 14% 16% 15% 16%Interest Income/(expense) 2,325 1,318 666 (777) (946) (851) 733Income before Tax 36,879 41,025 35,323 37,514 49,788 48,242 56,406 8%Taxation (13,687) (14,624) (12,946) (13,700) (18,860) (14,473) (16,922) 8%Income after Tax 23,192 26,401 22,377 23,814 30,928 33,769 39,484 7%MinoritiesAttributable Income 23,192 26,401 22,377 23,814 30,928 33,769 39,484 7%RatiosWeighted shares 63.0 63.0 63.0 63.0 63.0 63.0 63.0 EPS 368.1 419.1 355.2 378.0 490.9 536.0 744.6 DPS 368.1 419.1 355.2 378.0 490.9 536.0 744.6 Dividend Payout ratio 100% 100% 100% 100% 100% 100% 100%Dividend Yield 5.3% 6.0% 5.1% 5.4% 7.1% 7.7% 10.7%Production (m hl) 1.5 1.5 1.5 1.5 1.7 1.8 1.9 EV/hl (USD) 63.1 63.2 63.0 64.3 55.0 52.0 49.2 Mkt Cap/EBITDA 12.0 11.0 13.0 12.0 9.1 8.9 6.6 Growth RatiosSales growth 9.4% 5.0% 49.4% 16.3% 6.3% 8.0%EBITDA growth 9.0% -15.1% 8.6% 31.6% 1.9% 35.0%OP growth 14.9% -12.7% 10.5% 32.5% -3.2% 35.0%PBT growth 11.2% -13.9% 6.2% 32.7% -3.1% 38.9%NI growth 13.8% -15.2% 6.4% 29.9% 9.2% 38.9%MarginsGross margin 40.7% 45.4% 43.6% 33.7% 35.3% 34.8% 38.0%OP margin 22.4% 23.5% 19.5% 14.5% 16.5% 15.0% 18.7%PBT margin 23.9% 24.3% 19.9% 14.2% 16.2% 14.7% 18.9%PAT Margin 15.0% 15.6% 12.6% 9.0% 10.0% 10.3% 13.3%Effective Tax Rate 37.1% 35.6% 36.7% 36.5% 37.9% 30.0% 30.0%EBITDA margin 23.6% 23.5% 19.0% 13.8% 15.6% 15.0% 18.7%

40

m

NAMIBIA BREWERIES LIMITED Fishing in export markets…. Namibia Breweries Limited (Nambrew) is unique in that while most African breweries are focused on local organic growth driven by improving disposable incomes, Nambrew’s growth options locally are limited as a result of a relatively small country population of about 2.1m. Nambrew has therefore perfected its product range and instead penetrated regional premium markets in other countries such as South Africa and Angola.

Distribution agreements to offer long-term value. Nambrew has managed to launch products in the UK, Cameroon, Kenya and Uganda through a global distribution, brewing and licensing agreement with Diageo Plc for some of its brands. We expect this to translate to a significant contribution to revenue through royalties in the near term. In addition, the fact that Nambrew products in the South African market have been taken over by DHN Drinks, JV royalties will also become notable contributors to the top line.

Shaking off competition. Competitively priced wines and spirits are increasingly jostling for market share in a local market where personal disposable incomes are under pressure. Nambrew has in recent years restructured aggressively, shutting down the Hansa factory and emerging a leaner player with greater focus on building brand equity in its regional markets, which contribute 60% of sales.

Looking cheap. At an EV/hl of USD 88/hl, Nambrew is the cheapest brewer on our sample of SSA brewers (excluding, Zambia’s Natbrew). A PER of 9.9x and PBV of 2.4x is also attractive relative to peers. However, we expect future growth to largely be driven by export markets given the saturation in the local market. We have valued the counter using a DCF method and our target price implies 32% potential upside. BUY

BLOOMBERG: NBS:NW BUYCurrent Price (NAD) 8.15 Current Price (USD) 1.19 Target Price (NAD) 10.75 Target Price (USD) 1.56 Upside/downside 31.9%LiquidityMarket Cap (NAD) 1,683.2 Market Cap (USDm) 245.0 Shares (m) 206.5 Free Float (%)Ave. Daily vol ('000) 71.9 Share Price Performance6 Months (NAD) 7.5%Relative change (%)* 8.2%12 Months (NAD) 18.8%Relative change (%)* 12.4%*Relative to MSCI Frontier Market Index

Financials (NAD 000)-FY 30 June 2010 2011F 2012FTurnover 1,741,883 1,916,071 2,146,000 Operating Profit 313,791 330,889 386,448 Profit after tax 170,623 189,457 239,082 EPS (NAD) 0.83 0.92 1.16 DPS (NAD) 0.44 0.49 0.61 NAV/share (NAD) 3.39 4.21 5.13 Ratios 2010 2011F 2012FGearing 0.8% 0.6% 0.5%RoaA 11.0% 11.3% 13.3%RoaE 25.9% 24.2% 24.8%EV/EBITDA 5.4 5.1 4.4 EV/hl (USD) 87.8 87.8 87.8 PBV (x) 2.4 1.9 1.6 PER (x) 9.9 8.9 7.0 Earnings Yield 10.1% 11.3% 14.2%Dividend Yield 5.4% 6.0% 7.5%EBITDA margin 18% 17% 18%

EQUITY RESEARCH

NAMIBIA

MAY 2011


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Nambrew: Price Vs Volume

Volume Traded-RHS Price (NAD)-LHS

STRENGTHS WEAKNESSESStrong brand presence Saturated market in Namibia limitsEstablished export mkt in SA local growthLeader in local marketStrategic alliances with Diageo and and Heineken

OPPORTUNITIES THREATSContinued growth in Angola Cheap wines and beer importsGDP growth in SADC countries Recession in SAcould stimulate demand, particularly Rising input costsin export markets Rand/NAD strenghts may limit export

volumes

41

Nature of Business Established on 29 October 1920, Nambrew is one of the leading beverage manufacturing companies in Namibia and Southern Africa. Nambrew is the leader in the domestic beer market and has a significant share of the premium beer category in South Africa. The holding company of Nambrew is NBL Investment Holdings Limited of which the shareholding is held by Ohlthaver & List Finance and Trading Corporation Limited, Heineken International B.V. and Diageo plc. The company’s total exports account for more than 50% of total production output. The main flagship brands are Windhoek Lager, Tafel Lager and Windhoek Draught. Nambrew also distributes products from the Diageo stable and has an installed capacity of about 2.8m hl. H1 2011 Financial Results Overview Nambrew registered flat revenue growth of 0.4% from NAD 948.5m in H1 2010 to NAD 952.7m (USD 138.6m) in H1 2011. Beer contributed 93.0% to the group’s revenue whilst CSD sales contributed 4.2%. EBITDA was up 13.7% to NAD 233.8m, implying an EBITDA margin of 25% (H1 2010: 22%). The cost base largely benefited from lower malted barley prices. Overall, attributable profit increased by 38.0% to NAD 116.9m. Operational Review Focusing on export markets. Clearly, it has become an investing axiom that “if one is looking for high-octane returns they are better off investing in the fast growing economies of emerging markets”. In our view, Nambrew is exercising this through in ex-Namibia growth strategy. While there was good volume growth in Namibia in excess of 10%, turnover for H1 2011 was up 0.4%, indicating lower prices. The group continues to exceed its export market volume targets. In FY 2010, exports accounted for about 60% of total beer output. The non-South African export market (Angola, Uganda, Kenya and Zimbabwe) grew 16% (volumes). The successful launches of the Windhoek Lager brand into Great Britain, Kenya, Uganda and Cameroon were the major contributors. While Angola remains an attractive market for Nambrew on the basis of potential demand, the main constraint relates to currency movements. In addition, beer production volumes in Angola have been increasing. For example, Cuca has increased its volumes to about 6.0m hl. Outlook Ongoing improvements. Nambrew intends to direct capital towards improving operational effectiveness and efficiencies. In FY 2009 and FY 2010, the investment in capex excluding returnable containers was NAD 109.09m and NAD 47.97m, respectively. This trend is expected to continue. Agreements to offer long term value. Export markets will thus remain as growth areas for Nambrew. The recent cementing of the SADCCO (regional distribution agreement) and ROWCO (international distribution agreement) entities and partnerships with Heineken and Diageo will support further growth as the demand for Nambrew brands continues to grow. Valuation and Recommendation Nambrew definitely looks cheap at a PER of 9.9x, PBV of 2.4x and EV/EBITDA of 5.4x. In addition an EV/hl of USD 88/hl points to undervaluation. Excluding Zambia’s Natbrew, Nambrew is the cheapest brewer in SSA breweries. BUY.

Table 24: Shareholder StructureOhlthaver and list Group 51.0%Heineken and Diageo 28.9%Other shareholders 21.0%Source: IAS

Beer, 92.5%

Softs, 4.2% Other, 3.2%

Fig 40: H1 2011Revenue Split (Product)

Source:IAS


Income Statement (NAD 000) H1 2010 H1 2011 % Δ

Turnover 948,450 952,704 0.4%EBITDA 205,625 233,804 13.7%Net Finance Costs (3,854) (7,984) 107.2%PBT 125,956 163,285 29.6%Tax (41,500) (46,394) -11.8%Profit for the period 84,456 116,891 38.4%EPS(cents) 40.9 56.6 38.4%Balance Sheet (NAD 000) H1 2010 H1 2011 % Δ

Total Assets 1,657,845 1,776,521 7.2%NAV 659,551 769,539 16.7%Current Assets 619,066 646,420 4.4%Current Liabilities 278,004 286,641 3.1%Current ratio 2.23 2.26 Cash flow (NAD 000) H1 2010 H1 2011Operating activities 86,814 108,566Investing activities (199,329) (150,763)Financing activities 146,897 22,686

42

NAMBREW - 4 YEAR CGR COMPARISON

30 JUNE (NAD 000) 2005 2006 2007 2008 2009 2010 2011F 2012F 4yr CAGR

Turnover 892,352 929,297 1,045,496 1,331,396 1,577,370 1,741,883 1,916,071 2,146,000 17%Operating Expenses (857,849) (827,798) (898,480) (1,149,812) (1,309,903) (1,428,092) (1,585,182) (1,759,552) 15%Operating Profit 34,503 101,499 147,016 181,584 267,467 313,791 330,889 386,448 33%Finance Costs (14,041) (7,818) (5,933) (4,581) (3,425) (12,075) (12,679) (13,313) 11%Finance income 2,252 6,471 11,861 13,109 11,729 18,340 19,165 20,028 30%Profit before tax 19,562 101,833 154,835 183,846 240,141 241,684 266,841 336,735 24%Income Tax 538 (18,568) (33,634) (42,446) (70,918) (71,061) (77,384) (97,653) 40%Profit after tax 20,100 83,265 121,201 141,400 169,223 170,623 189,457 239,082 20%RatiosShares (m) 206.5 206.5 206.5 206.5 206.5 206.5 206.5 206.5 EPS (NAD) 0.1 0.4 0.6 0.7 0.8 0.8 0.9 1.2 DPS (NAD) 0.3 0.1 0.3 0.3 0.4 0.4 0.5 0.6 Dividend Cover 0.4 2.9 2.2 2.1 2.1 1.9 1.9 1.9 Dividend Yield 3.4% 1.7% 3.3% 4.0% 4.8% 5.4% 6.0% 7.5%NAV (NAD) 1.6 1.9 2.2 2.6 3.0 3.4 4.2 5.1 EV/EBITDA 50.5 16.9 11.6 9.3 6.3 5.4 5.1 4.4 EV/hl 98.3 94.5 87.8 87.8 87.8

Growth RatiosSales growth 4.1% 12.5% 27.3% 18.5% 10.4% 10.0% 12.0%OP growth 194.2% 44.8% 23.5% 47.3% 17.3% 5.4% 16.8%PBT growth 420.6% 52.0% 18.7% 30.6% 0.6% 10.4% 26.2%PAT growth 314.3% 45.6% 16.7% 19.7% 0.8% 11.0% 26.2%MarginsOP margin 3.9% 10.9% 14.1% 13.6% 17.0% 18.0% 17.3% 18.0%PBT margin 2.2% 11.0% 14.8% 13.8% 15.2% 13.9% 13.9% 15.7%PAT margin 2.3% 9.0% 11.6% 10.6% 10.7% 9.8% 9.9% 11.1%

43

PHOENIX BEVERAGES LIMITED Winds of change blowing in favour of Phoenix… Phoenix has established itself as the most preferred brewer in Mauritius. The flagship brand, Phoenix is the post popular beer, just as Coca-Cola is the preferred carbonated drink. According to management, Phoenix Beverages plans to be the biggest brewing and beverage company in the Mauritius, Madagascar and Reunion Island region. The three countries have a beer market of 1.6m hl, of which Mauritius accounts for 22% or 350,000 hl. Phoenix controls 95% of Mauritius’s beer market and 9.0% of the market in Reunion.

The Madagascar market to offer long term upside.

In partnership with UNIBRA, Phoenix has concluded commercial entry into the Madagascar market through the construction of a new brewery, “Nouvelle Brasserie de Madagascar SA”. Phoenix is targeting 25% of the 900,000 hl Malagasy beer market by 2015. Phoenix holds a 40% stake in Nouvelle Brasserie de Madagascar SA. Societe Tananarivienne de Refrigeration et de Boissons Gazeuses is the only other brewery operating in that country and commands a market share of about 60%.

CSDs also present an opportunity. PBL has also been increasing its soft drinks market share. This initiative was boosted by the entry of Coke Zero which quickly captured the lead in the low calorie segment.

Tight register limits downside risk. On a relative basis, Phoenix has lower than average return measures (RoaE and RoaA) and a demanding PER of 21.8x. However, an EV/hl of USD 102/hl is at a significant discount to the sector average. We see scope for further volume growth in Madagascar and other key export markets. Our two valuation methods generated a target price of MUR 257, indicating 23% potential upside. BUY

BLOOMBERG: PBL:MP BUYCurrent Price (MUR) 210 Current Price (USD) 7.34 Target Price (MUR) 257.30 Target Price (USD) 9.00 Upside/downside 22.5%LiquidityMarket Cap (MURm) 3,453 Market Cap (USDm) 121 Shares (m) 16.4 Free Float Ave. Daily vol ('000) 7.4 Share price performance6 Months (MUR) 12.3%Relative change (%)* 12.9%12 Months (MUR) 28.8%Relative change (%)* 22.4%*Relative to MSCI Frontier Market Index

Financials (MURm)-FY 30 June 2010 2011F 2012FTurnover 3,401 3,741 4,115 EBITDA 580 638 734 Attributable profit 166 186 209EPS (MUR) 10.1 11.3 12.7DPS (MUR) 6.7 7.5 8.0 NAV/share (MUR) 130.0 146.3 164.6 Ratios 2010 2011F 2012FGearing 2.6% 2.4% 2.3%RoaA 5.5% 5.1% 5.2%RoaE 7.9% 8.2% 8.2%EV/EBITDA 6.1 5.5 4.8 EV/hl (USD) 102.3 98.2 94.5 PBV (x) 1.6 1.4 1.3 PER (x) 20.8 18.5 16.6 Earnings Yield 4.8% 5.4% 6.0%Dividend Yield 3.2% 3.6% 3.8%EBITDA margin 17.1% 17.1% 17.8%

STRENGTHS WEAKNESSESHighy rated brands Limited growth in MauritiusStrategic relationship with Diageo Limited free floatenables wider distributionDiverse products portfolio

OPPORTUNITIES THREATSA booming tourism sector in Mauritius Political conflicts in MadagascarGrowth into non-alcoholic Increased local competitionbeverages such as water Commodity price increases (Barley)Lucrative export markets Slump in tourist arrivals

EQUITY RESEARCH

MAURITIUS

MAY 2011


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Phoenix: Price Vs Volume

Volume Traded-RHS Price (MUR)-LHS

44

Nature of Operations Phoenix Beverages Limited (PBL) is a leading beverages company. PBL produces an average of 1.2m hl of alcoholic and non alcoholic drinks and delivers its products to over 9,000 outlets. PBL acquired the whole share capital of Phoenix Camp Minerals Ltd (PCM) in 2008. PCM is the sole authorised Coca-Cola bottler in Mauritius. PBL also produces and sells under contract agreement with Diageo, world famous brands such as Guinness Foreign Extra Stout, Malta Guinness and Smirnoff Ice for the local market. Its flagship brand, Phoenix beer, was launched in 1963 and has since become the preferred beer of Mauritius and in many other countries such as Angola. More recently, PBL has also started importing and distributing wines, spirits and champagnes from France, South Africa, Australia, United States, Chile, Italy, China and Argentina. Q3 2011 Financial Results Overview PBL registered 10% top-line growth to MUR 2.8bn (USD 104.0m). This was largely driven by a 3.4% growth in sales volumes. However, EBIT declined 6.6% to MUR 218.0m, implying an EBIT margin of 7.7%. The group’s profit for the nine months declined 4.1% to MUR 130.0m. Group performance was negatively affected by lower export sales volumes, high input costs as a result of an increase in international commodity prices and constrained trading conditions on the local market emanating from stressed purchasing power. However, the associate company Nouvelle Brasserie de Madagascar SA began commercial operations in December 2010. Sales volumes for the three months to March 2011 were above initial budget forecasts. Operational Review A focus on cost management. In 2008, PBL was amalgamated with two of its wholly owned subsidiaries, namely Phoenix Camp Minerals Limited and Rodnix Limited. This was in line with the group’s strategy to reduce costs and administrative complexities. Efforts have continued since then to re-model and re-structure the business so as to maximise efficiencies. Water business also ‘lucrative”. PBL has continued to aim for higher growth in its water bottling business. PBL’s flagship water brand is Crystal which was first produced in the early ‘70s and initially targeted to the hotels sector. PBL commands an estimated local market share of about 50% through its Crystal brand. Competing brands include Vital and others. PBL invested around MUR 55.0m (USD 2.0m) in production line upgrades so as produce soft drinks and water. Outlook Export volumes to key targeted markets are expected to increase. The International Business unit is actively seeking overseas partners to promote and sell Phoenix Lager in countries such as Reunion Island, Mayotte, South Africa, Burkina Faso, Togo, United Kingdom, France, Australia, Malaysia and Singapore. PBL’s medium term goal is to increase its share of exports from approximately 10% to 30%, which, in our view is achievable without having to invest significantly. Valuation and Recommendation The investment case in PBL lies in the successful entry into the Madagascar market and the potential forays of its key brand in new markets. Just like Nambrew, we expect future growth to be driven by export markets. On a relative basis, Phoenix has lower than average return measures (RoaE and RoaA) and a demanding PER of 21x. However, an EV/hl of USD 102/hl is at a 13% discount to the sector average. Our two valuation methods generated a target price of MUR 257 per share, representing 23% potential upside. The share is alos tightly held, limiting downside risk. BUY

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Fig 42: PBL Financial Trends

Turnover (MURm)-LHS EBITDA (MURm)-LHSROCE-RHS ROE-RHSSource:IAS

Local, 92%

Overseas, 8%

Fig 41: Q3 2011 Revenue Split

Source:IAS

Table 26: Top 5 Shareholders' ListPhoenix Investment Company 31.0%Camp Investment Company 17.1%Compagne d'Investissement et det Development 3.2%The Anglo Mauritius Assurance Society 2.5%Renaissance Africa Master Fund 2.3%Source:IAS

Income Statement (MURm) Q3 2010 Q3 2011 % Δ

Revenue 2,583 2,842 10.0%EBIT 234 218 -6.6%Finance costs (17) (22) 30.4%PBT 177 167 -5.8%Tax (42) (37) -11.2%Attributable earnings 136 130 -4.1%EPS (MUR) 8.29 7.93 -4.3%Balance Sheet (MURm) H1 2011 Q3 2011 % Δ

Total Assets 3,049 3,225 5.8%NAV 2,138 2,252 5.3%Current Assets 725 952 31.3%Current Liabilities 655 663 1.2%Current ratio 1.11 1.44Cash flow (MURm) Q3 2010 Q3 2011Operating activities 134.3 201.2Investing activities (234.6) (150.1)Financing activities (32.0) 51.0


45

PHOENIX - 5 YEAR CGR COMPARISON

30 JUNE (MURm) 2005 2006 2007 2008 2009 2010 2011F 2012F 5yr CAGR

Income StatementRevenue 2,200 2,298 2,709 2,897 3,202 3,401 3,741 4,115 9%Excise Duty (506) (508) (672) (671) (712) (800) (816) (832) 10%EBITDA 308 435 490 492 506 580 638 734 13%Depreciation (153) (164) (199) (197) (183) (184) (186) (188) 4%Interest paid (50) (39) (33) (23) (21) (22) 22 20 -15%Associates 6 1 (7) (33) (31) (43) 8 10PBT 105 232 258 272 302 217 243 273 16%Attributable profit 94 240 269 222 249 166 186 209 12%RatiosShares (m) 16.4 16.4 16.4 16.4 16.4 16.4 16.4 16.4EPS (MUR) 5.72 14.59 16.36 13.50 15.14 10.11 11.33 12.68DPS (MUR) 4.50 4.50 5.00 5.50 6.50 6.70 7.50 8.00Dividend Cover 1.27 3.24 3.27 2.45 2.33 1.51 1.51 1.59Dividend Yield 2.1% 2.1% 2.4% 2.6% 3.1% 3.2% 3.6% 3.8%NAV 71.7 71.6 109.6 118.6 127.1 130.0 146.3 164.6EV/EBITDA 12.8 8.5 7.2 7.4 6.9 6.1 5.5 4.8

EV (USD)/hl 124.9 117.3 112.0 116.1 111.5 102.3 98.2 94.5Growth RatiosSales growth 4.5% 17.9% 6.9% 10.5% 6.2% 10.0% 10.0%EBITDA growth 41.2% 12.6% 0.4% 2.8% 14.6% 10.0% 15.0%PBT growth 121.0% 11.2% 5.4% 11.0% -28.0% 12.0% 12.0%Earnings growth 155.3% 12.1% -17.5% 12.2% -33.2% 12.0% 12.0%MarginsEBITDA margin 14.0% 18.9% 18.1% 17.0% 15.8% 17.1% 17.1% 17.8%PBT margin 4.8% 10.1% 9.5% 9.4% 9.4% 6.4% 6.5% 6.6%Earnings margin 4.3% 10.4% 9.9% 7.7% 7.8% 4.9% 5.0% 5.1%

46

SAB MILLER plc Cementing its position as the leading brewer on the African continent… SABMiller’s Africa division is growing in terms of its contribution to group performance, contributing 11% of total volumes (27m hl), 11% of revenues and 12% of EBITA, with EBITA increasing at a CAGR of 11% over the past 5 years. SABMiller, which has operations in 36 of the 52 countries in Africa, has also raised its revenue and margin targets as a result of its new investments in high growth regions like Angola, Tanzania and Mozambique. Strong economic and population growth rates are driving Africa's demand for beer and SABMiller has spent about USD 1.5bn in Africa over the last three to four years.

Venturing in new territories. SABMiller’s initiatives

of venturing into new markets have gathered momentum. SABMiller recently entered the Southern Sudan and Nigerian market. In Nigeria, SABMiller had acquired a small beer maker called Pabod Breweries Ltd in 2009. Given a relatively large beer market in that country (second to South Africa) of around 18.0 m hl, SABMiller will spend over USD 100.0m in building a new brewery in the greenfield site at Onitsha in south-east Nigeria, to expand its presence there. Given that Nigeria’s 18.0m hl beer market is growing at an annual rate of c9.0%, there continues to be further headroom for expansion despite the presence of Heineken (Nigerian Breweries) and Diageo plc (Guinness Breweries).

Downside risks are also notable. While the general sentiment on Africa is positive, risks are also high in certain markets. In Uganda, for example the government intends to increase excise duty, despite double digit growth in sales volumes over the past years. In Botswana, government policies aimed at limiting alcohol consumption are a key threat despite efforts by Sechaba of “influencing” consumers at the point of sale by setting up beer halls/ gardens.

BLOOMBERG: SAB:SJCurrent Price (ZAR) 253.04 Current Price (USD) 37.82 Target Price (ZAR)Target Price (USD)Upside/DownsideLiquidityMarket Cap (ZAR) 401,515.8 Market Cap (USDm) 60,017.3 Shares (m) 1,586.8 Free Float (%)Ave. Daily vol ('000) 1,618.2 Share price performance6 Months (ZAR) 11.6%Relative change (%)* 12.2%12 Months (ZAR) 15.5%Relative change (%)* 9.1%*Relative to MSCI Frontier Market Index

Financials (USDm)-FY 31 Mar 2011 2012F 2013FTurnover 28,311 31,088 34,317 EBITDA 5,044 5,979 6,600 Attributable earnings 2,408 2,854 3,151 EPS (USD) 1.91 2.38 2.63 DPS (USD) 0.81 0.88 0.97 NAV/share (USD) 14.0 15.4 16.9 Ratios 2011 2012F 2013FGearing 38% 36% 33%RoaA 7.9% 9.2% 9.3%RoaE 14.4% 17.0% 17.0%EV/EBITDA 12.7 10.7 9.7 EV/hl (USD) 237.6 225.7 214.3 PBV (x) 2.7 2.5 2.2 PER (x) 19.8 15.9 14.4 Earnings Yield 5.1% 6.3% 6.9%Dividend Yield 2.1% 2.3% 2.6%EBITDA margin 18% 19% 19%

EQUITY RESEARCH

SOUTH AFRICA/UK

MAY 2011


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SABMiller: Price Vs Volume

Volume Traded-RHS Price (ZAR)-LHS

STRENGTHS WEAKNESSESGlobal geographical spread High operating cost structure as a result ofStrong brand portfolios sizeStrong cash generation capabilitiesContractual agreements with key supplierscovering multiple time horizons

OPPORTUNITIES THREATSConsolidation and expansion opportunities Constant changes in consumer preferencesin emerging markets including SSA Regulatory constraints in terms of taxesGlobal economic recovery Raw material volatility in terms of supply

and pricingUncertain global economic growthDiseconomies of scale as a result of size

47

An overview of strategy in Africa Focus centred on emerging markets. We opine that while consumer spending remains subdued in developed markets (USA and Europe), the incremental improvement in economic conditions across most of emerging markets is likely to be maintained. SABMiller’ strategy is largely aligned to emerging markets (South America, Asia and Africa), given the vast potentials in the markets. Over the last 10-15 years, SABMiller’s strategy in Africa was largely product-oriented as it was hinged on “cleaning up its assets’ and increasing capacity. However, the strategy has shifted to a more customer-oriented approach. As a result, we have seen SABMiller investing in key brands across its markets. For example, the Eagle Lager has been introduced in Tanzania and Zambia. Increasing presence and capacity. SABMiller is now focusing more on growth in new markets such as Nigeria, Southern Sudan and Ethiopia. Other nations earmarked for future growth include Uganda and Zambia. As a result, the group recently commissioned breweries in Angola (North Luanda: 2.5m hl), Mozambique (Nampula: 0.5m hl) and Tanzania (Mbeya: 0.5m hl). Moreover, new operations in Southern Sudan (Juba) and Ethiopia (Ambo Water) were launched. We believe the investments are a clear indication of the company’s bullish expectations on Africa. Multi-beverage model to create scale advantages. The strategy in Africa has been to further diversify the range and mix of beverages. These efforts have seen good performances from local and regional premium brands, water and other non-alcohol categories. In Botswana for example, Sechaba has now expanding of non-alcoholic segments such as CSDs. SABMiller is basically implementing a similar strategy in Africa as was implemented in the South American market which entailed building diverse product portfolios (beer, CSD and water) relative to competitors. Focus on premium and affordable beer categories. It is worth mentioning that SABMiller has adopted much broader portfolios and longer price ladders in various markets. The group is considering introducing Chibuku (a low capital, low price and good margin product) in all of its markets in Africa, with test-marketing having been concluded in Nigeria and Mozambique. The Eagle Lager has also performed well in countries such as Zimbabwe. Conclusion FY 2011 results are a clear testimony of the growth in emerging markets. In FY 2011, the Africa division delivered lager volume growth of 13% including Zimbabwe, and 9% excluding Zimbabwe, on an organic basis. According to management, the performance was largely attributable to greater focus on route to market activities, improved and differentiated brand portfolios as well as the continued economic growth across the region. Regional premium brands maintained robust growth, with Castle Lager up by 20%. CSD volumes grew 8.0% organically (4.0% excluding Zimbabwe) and 18% on a reported basis. Zimbabwe’s Delta is back in the fold. SABMiller has started accounting for its 37% owned Zimbabwe unit as economic and political conditions have improved. It is important to note that SABMiller’s pro-rata share in Delta contributes the largest share in the Africa portfolio by volume. Delta has experienced a strong recovery as a result of a shift to a multi currency regime in Zimbabwe. Partnerships are pivotal in pursuing a growth strategy. One of SABMiller’s key strength is in its successful partnerships with Castel and the Coca-Cola Company. We believe SABMiller still has significant opportunities to pursue further M&A in Africa which could add strategic value. This would entail SABMiller securing further equity participation in those assets where it has a joint venture partner, such as BGI/Castel in Africa.

2.2% 2.2%

4.0%4.3% 4.5% 4.7%

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Fig 46: Growth in Real Disposable Income (2011-15)

Source:SABMiller

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Fig 44: Estimated Pop. Growth (2010-13)

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Fig 43: SABMiller’s foot print in Africa

Fig 45: Per Capita Consumption (PCC)

48

Note: Given that our focus is mainly on African players and not global groups such as SAB Miller, Diageo and Heineken, our analysis is limited to SAB Miller’s African operations. We have therefore compiled this section strictly for comparative purposes. Also note that our forecasts are largely based on consensus estimates.

SAB MILLER - 5 YEAR CGR COMPARISON

31 MARCH (USDm) 2006 2007 2008 2009 2010 2011 2012F 2013F 5yr CAGR

Latin America 2,165 4,392 5,251 5,495 5,905 6,335 6,969 7,665 24%

Europe 3,258 4,078 5,248 6,145 5,577 5,394 5,879 6,409 11%

North America 4,912 4,887 5,120 5,227 5,228 5,223 5,484 5,758 1%

Africa and Asia 2,221 2,674 3,367 4,132 4,457 5,280 6,600 8,250 19%

South Africa: 4,525 4,614 4,842 4,303 5,183 6,079 6,156 6,235 6%

Beverages 4,204 4,274 4,446 3,955 4,777 5,598 5,654 5,711 6%

Hotels and Gaming 321 340 396 348 406 481 502 524 8%

Group Revenues 17,081 20,645 23,828 25,302 26,350 28,311 31,088 34,317 11%

Revenue 15,307 18,620 21,410 18,703 18,020 19,408 23,005 25,395 5%

Operating Profit 2,575 3,027 3,448 3,148 2,619 3,127 3,707 3,411 4%

EBITDA 3,348 4,031 4,518 4,164 3,974 5,044 5,979 6,600 9%

Net Finance Costs (299) (428) (456) (706) (563) (525) (473) (425) 12%

Share of associates and JVs 177 205 272 516 873 1,024 1,178 1,354 42%

Taxation (779) (921) (976) (801) (848) (1,069) (1,176) (1,293) 7%

Minority Interests (234) (234) (265) (276) (171) (149) (150) (152) -9%

Attributable profit 1,440 1,649 2,023 1,881 1,910 2,408 2,854 3,151 11%

Adjusted Earnings 1,497 1,796 2,147 2,065 2,509 3,018 3,749 4,139 15%

Balance Sheet (USDm)Non current assets 24,286 25,683 31,947 28,156 33,609 34,864 39,187 44,046 7%

Current assets 2,829 3,053 4,135 3,472 3,895 4,178 4,763 5,430 8%

Total Assets 27,115 28,736 36,082 31,628 37,504 39,108 43,950 49,476 8%

Derivative Financial Instruments (178) (209) (531) (142) (321) (135) (142) (150) -5%

Borrowings (7,602) (7,231) (9,658) (9,618) (9,414) (8,460) (8,672) (8,888) 2%

Other liabilities and provisions (5,750) (6,295) (7,649) (5,751) (7,170) (7,889) (8,086) (8,288) 7%

Total liabilities (13,530) (13,735) (17,838) (15,511) (16,905) (16,349) (16,900) (17,327) 4%

Total shareholders equity 13,043 14,406 17,545 15,376 19,910 22,008 24,209 26,630 11%

Minority interests in equity 542 595 699 741 689 751 811 876 7%

Total Equity 13,585 15,001 18,244 16,117 20,599 22,759 25,020 27,506 11%

Free cash flow (904) 934 545 97 2,028 2,488 2,849 3,262 -222%

Growth RatiosNumber of Shares (m) 1,575 1,580 1,583 1,585 1,558 1,576 1,576 1,576 EPS (USD) 0.95 1.14 1.36 1.30 1.61 1.91 2.38 2.63 DPS (USD) 0.33 0.43 0.49 0.58 0.68 0.81 0.88 0.97 NAV (USD) 8.28 9.12 11.08 9.70 12.78 13.96 15.36 16.90 RoA 5.52% 6.43% 6.62% 6.10% 7.26% 7.88% 9.21% 9.34%RoE 11.48% 13.09% 13.44% 12.55% 14.22% 14.40% 17.00% 17.02%MarginsEBITDA margin 19.60% 19.53% 18.96% 16.46% 15.08% 17.82% 19.23% 19.23%OP margin 15.08% 14.66% 14.47% 12.44% 9.94% 11.05% 11.92% 9.94%PAT margin 8.76% 8.70% 9.01% 8.16% 9.52% 10.66% 12.06% 12.06%

49

SECHABA BREWERY HOLDINGS LIMITED Regulations hovering over industry players like the “Sword of Damocles”… Sechaba is a subsidiary of the SABMiller group and is made up of Kgalagadi Breweries (KBL) which specialises in soft drinks, clear beer and mineral water and Botswana Breweries (BBL), which focuses on traditional (opaque) beer.

Treading water? The year 2010 was undoubtedly one

of the group’s toughest years, with the downturn in the economy, high distribution costs, and to top it off, the government was determined to curb alcohol abuse by hiking prices and restricting liquor trading hours.

Government throwing grenades in the form of

alcohol price increases and levies. Management has repeatedly cited that a 1.0% increase in alcohol prices roughly translates into an approximate 1.0% decline in volumes. In addition, ever since the alcohol levy (at 30%) was introduced in November 2008, the group’s sales volumes have been on a downward trajectory. With the levy now increased to 40%, effective 1st December 2010 and VAT increased to 12%, we expect a further decline in volumes, sales and profitability.

A big fish in a small pond? We think Sechaba will have to work very hard to achieve its revenue targets for FY 2011 and FY 2012 in the wake of regulations from the government. It is worth noting that at current levels Sechaba shares are trading at a discount to sector averages. The company’s PER of 12.6x (50% discount to Delta’s and PBL’s ratings). We strongly feel that the market has factored in the regulation risks. We see limited growth prospects in the short to medium term. SELL

EQUITY RESEARCH

BOTSWANA

MAY 2011


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Volume Traded-RHS Price (BWP)-LHS

BLOOMBERG: SCHB:BG SELLCurrent price (BWP) 11.50 Cuurent price (USD) 1.75 Target price (BWP) 12.00 Target price (USD) 1.82 Upside/Downside 4%LiquidityMarket cap. (Pm) 1,529.66 Market cap. (USDm) 232.12 Shares (m) 133.0 Free FloatAve Daily vol ('000) 82.813Share Price Performance6 Months (BWP) 9.5%Relative change (%)* 10%12 Months (BWP) -4%Relative change (%)* -11%*Relative to MSCI Frontier Market Index

Financials (BWPm)-FY 31 March 2010 2011F 2012FRevenue 1,186.47 949.18 968.16 EBITDA 272.53 213.42 209.49 Attributable income 121.85 96.92 98.31 EPS (thebe) 91.61 72.86 73.91 DPS (thebe) 85.00 66.88 67.83 NAV/share (thebe) 1.88 1.89 1.91 Ratios 2010 2011F 2012FGearing 27.5% 25.8% 24.5%RoaA 36.5% 32.3% 36.3%RoaE 89.6% 78.0% 83.9%EV/EBITDA 5.3 6.8 6.9EV/hl (USD) 102.2 99.4 95.3PBV (x) 6.1 6.1 6.0 PER (x) 12.6 15.8 15.6 Earnings Yield 8.0% 6.3% 6.4%Dividend Yield 7.8% 6.9% 7.4%EBITDA margin 23.0% 22.5% 21.6%

STRENGTHS WEAKNESSESDiverse product portfolio Small population of about 2.0m implies Stable economy and governance that there is limited growthDominant brewer in Botswana Power outages Relatively high disposable incomes ona comparative basis

OPPORTUNITIES THREATSIncreased exports to region Government policiesFocus non-alcoholic beverages consumption and taxResurging night-life in major cities Cheap wines and spirits

Increasing comptetition in bothclear and opaque beer

50

Nature of Operations Sechaba Brewery Holdings Limited (incorporated in Botswana) (SBHL), is an investment company with interests in Kgalagadi Breweries Limited (KBL) and Botswana Breweries Limited (BBL). KBL specialises in soft drinks, clear beer and mineral water whilst Botswana Breweries (BBL) brews traditional beer. SBHL has a 60% shareholding in the two companies, while SABMiller Botswana B.V. holds 40%. SABMiller Plc has management control in both operating companies. They operate four traditional beer breweries, a clear beer brewery, a sparkling soft drinks production plant and six sales and distribution depots. Total capacity is in the region of 2.2m hl. H1 2011 Financial Results Overview SBHL registered a 2.5% decline in revenue to BWP 539.1m (USD 82.3m) on the back of the recessionary economic conditions and aggressive price cuts. Sales volumes of both clear and sorghum beer declined by 6.0% during the period. While gross profit declined marginally to BWP 224.7m, the GP margin was up from 41% in H1 2010 to 42%. This was a result of sustainable local commodity prices (wheat, barley and sorghum) and favourable exchange rate movements. BBL managed to reduce its variable costs by 20%. Overall, a profit after tax of BWP 86.8m was registered (decline of 4.0% on H1 2010). Operational Review Alcohol levy promoting imports. Generally, levies on imported products are collected at the points of entry in Botswana. The levy is charged on a cost, insurance and freight (CIF) basis while it is charged on the ex-factory selling price for local products. The resultant quantum of levy is thus significantly lower in the case of imports. SBHL has therefore been forced to sacrifice margins so as to remain competitive. Changing drinking habits. On the whole, the alcohol industry in Botswana has experienced a large scale migration in people’s drinking habits as they move from low alcohol content products to higher alcohol content and cheaper imported products. This is evident in the reduced dominance of the low-alcohol content St Louis brand, and Black Label’s increased market share (with the highest alcohol content). SABMiller to pursue a passive strategy. The global brewer indicated in its FY 2011 results presentation that it will not pursue an aggressive strategy in Botswana largely due to government policies earmarked and eliminating alcohols consumption levels. However, Sechaba has largely remained a significant tax payer and a participant in a number of local farming initiatives. Outlook Shifting towards beer gardens. As a strategy to comply with regulations, SBHL is focusing on outlet development projects that are aimed at relocating customers from residential outlets to commercial outlets/beer gardens. The project is a direct response to the banning of the sale of alcohol in residential areas. More levy hikes to be expected. Levy hikes may continue given the fact that the levy increases have not resulted in reduced consumption, as they were intended to. Instead there has been product switching, with an increase in the consumption of the more potent imported drinks and spirits. Government is adamant that if consumption does not decrease, the levy will be hiked again. Therefore, we anticipate further levy hikes in FY 2012. Valuation and Recommendation SBHL has the widest EBITDA margin of 23.0% on a sample of southern African breweries. However, return measures (RoaE and RoaA) are the lowest. Unless measures are taken, we would expect some lackluster performance in the future. SELL

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Fig 47: SBHL-Sales and Margins

Source:IAS

Table 28: Top 5 Shareholder's ListBotswana Development Corporation 25.60%SAB Miller Africa BV 16.80%Stanbic Nominees (AG BPOPF) 7.40%Stanbic Nominees (BIFM BPOPF) 5.50%MVA Fund 4.60%Source: IAS

Income Statement (BWP 000) H1 2010 H1 2011 % Δ

Turnover 552,770 539,077 -2.5%Cost of Sales (326,539) (314,328)Gross profit 226,231 224,749 -0.7%Operating Profit 116,052 108,504 -6.5%Profit before tax 110,760 103,859 -6.2%Profit after tax 90,373 86,771 -4.0%EPS (Thebe) 38.00 37.00 -2.6%Balance Sheet (BWP 000) H1 2010 H1 2011 % Δ

Total Assets 202,213 209,347 3.5%NAV 167,437 186,736 11.5%Current Assets 39,573 27,272 -31.1%Current Liabilities 34,776 22,612 -35.0%Current ratio 1.14 1.21Cash flow (BWP 000) H1 2010 H1 2011Operating activities (10,040) (8,470)Investing activities 62,318 50,139Financing activities (51,510) (41,370)


51

SECHABA - 4 YEAR CGR COMPARISON

31 MARCH (BWPm) 2006 2007 2008 2009 2010 2011F 2012F 4yr CAGR

Income StatementSales 920.4 1,076.2 1,283.9 1,409.4 1,186.5 949.2 968.2 7%COS (486.9) (637.5) (783.1) (859.0) (699.6) (569.5) (590.6) 9%Gross Profit 433.5 438.8 500.8 550.3 486.9 379.7 377.6 3%GP Margin 47% 41% 39% 39% 41% 40% 39%

Sales & distribution costs (11.6) (13.5) (14.6) (20.3) (47.6) (38.0) (38.7) 42%Other 5.9 6.4 4.0 22.4 16.9 18.5 20.4 30%Admin (142.4) (147.9) (171.2) (191.1) (183.6) (146.8) (149.8) 7%Total Operating Costs (148.1) (154.9) (181.8) (189.0) (214.3) (166.3) (168.1) 10%Operating Profits 285.4 283.8 319.0 361.4 272.5 213.4 209.5 -1%OP Margin 31% 26% 25% 26% 23% 22% 22%Interest Income/(expense) (13.3) (15.6) (10.2) (14.0) (10.0) (4.5) 2.4 -7%Profit before Tax 272.1 268.2 308.8 347.4 262.5 208.9 211.9 -1%Taxation (49.7) (45.1) (52.5) (59.0) (44.6) (35.5) (36.0) -3%Profit after Tax 222.4 223.1 256.3 288.3 217.9 173.4 175.9 -1%Minorities (98.9) (97.0) (112.1) (126.1) (96.1) (76.5) (77.5) -1%Attributable Income 123.6 126.1 144.2 162.2 121.9 96.9 98.3 0%RatiosWeighted Shares 133.0 133.0 133.0 133.0 133.0 133.0 133.0 EPS(t) 92.9 94.8 108.4 122.0 91.6 72.9 73.9 DPS (t) 93.0 85.0 102.0 109.0 85.0 66.9 67.8 Payout ratio 100% 90% 94% 89% 93% 92% 92%NAV per share 1.3 1.4 1.6 1.8 1.9 1.9 1.9 Production (m hl) 2.3 2.3 2.4 2.4 2.2 2.2 2.3 EV/hl (USD) 93.9 95.6 94.0 90.5 102.2 99.4 95.3 Growth RatiosSales growth 16.9% 19.3% 9.8% -15.8% -20.0% 2.0%OP growth -0.6% 12.4% 13.3% -24.6% -21.7% -1.8%Opex growth 3.9% 15.8% 11.6% -3.9% -20.0% 2.0%PBT growth -1.4% 15.1% 12.5% -24.4% -20.4% 1.4%PAT growth 0.3% 14.9% 12.5% -24.4% -20.4% 1.4%MarginsGross margin 47.1% 40.8% 39.0% 39.0% 41.0% 40.0% 39.0%Op margin 31.0% 26.4% 24.8% 25.6% 23.0% 22.5% 21.6%PBT margin 29.6% 24.9% 24.1% 24.6% 22.1% 22.0% 21.9%Earnings margin 13.4% 11.7% 11.2% 11.5% 10.3% 10.2% 10.2%Effective Tax Rate 18.3% 16.8% 17.0% 17.0% 17.0% 17.0% 17.0%EBITDA margin 31.0% 26.4% 24.8% 25.6% 23.0% 22.5% 21.6%

52

ZAMBIAN BREWERIES GROUP Dominating the local beer market… We like Zambian Breweries, a dominant player in the Zambian clear beer industry with a market share of approximately 90%. Local sourcing initiatives have also been successful with all barley required for lager beer now being grown in Zambia.

The reduction of excise duty is a key theme. After years of negotiating with the Government on duties and levies, a reduction in excise duty on clear beer from 60% to 40% was a positive development for local market players as this restored competitiveness. As a direct result of the drop in excise duty, management sales volumes for clear beer have grown to approximately 1.0m hl from about 700,000 hl in 2010. CSD volumes have also increased to about 600,000 from 520,000 hl in 2010.

Innovation reaping tangible savings. Zambian

Breweries Plc was recently re-structured by way of consolidating its four subsidiaries into one entity. The re-organisation was aimed at reducing administrative costs, duplication of work and to improve tax efficiency for the group. In addition, Zambrew spearheaded some trials in 2009 that were carried out to test the viability of growing barley in Zambia. The trials were successful and have led to full commercial barley production. The Company has also deepened its local sourcing initiative both in the downstream and upstream value chain. We expect these initiatives to reap positive results in the future.

It’s a long term story. At an EV/hl of USD 189/hl the counter remains one of the most expensive Southern African brewers. However, it is quite clear that Zambrew’s investment drive over the years in PPE will translate into margin expansion in the long term. HOLD

BLOOMBERG: ZMBR:ZL HOLDCurrent Price (ZMK) 2,651 Current Price (USD) 0.56 Target Price (ZMK) 3,100 Target Price (USD) 0.65 Upside/Downside 16.9%LiquidityMarket Cap (ZMK) 964,964 Market Cap (USDm) 202.7 Shares (m) 364.0 Free Float (%) 20.0 Ave. Daily vol ('000) 78.3 Share price performance6 Months (ZMK) 20.5%Relative change (%)* 21.2%12 Months (ZMK) 40.3%Relative change (%)* 33.9%*Relative to MSCI Frontier Market Index

Financials (ZMKm)-FY 31 March 2011 2012F 2013FTurnover 996,181 1,185,455 1,416,619EBITDA 123,422 147,053 168,544Attributable earnings 45,308 61,323 74,972EPS (ZMK) 124.5 168.5 206.0DPS (ZMK) - - - NAV/Share (ZMK) 577.2 607.5 640.8 Ratios 2010 2011F 2012FGearing 217% 217% 215%RoaA 4.4% 5.5% 6.3%RoaE 22.6% 28.4% 33.0%EV/EBITDA 11.5 9.8 8.7 EV/hl (USD) 188.8 191.8 194.9 PBV (x) 4.6 4.4 4.1 PER (x) 21.3 15.7 12.9 Earnings Yield 4.7% 6.4% 7.8%Dividend Yield - - - EBITDA margin 12.4% 12.4% 11.9%

EQUITY RESEARCH

ZAMBIA

MAY 2011


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Zambrew: Price Vs Volume

Volume Traded-RHS Price (ZMK)-LHS

STRENGTHS WEAKNESSESDominant position with market Exposed to energy disruptionsshare of 90% Exposed to commoditySignificant asset base price shocksBackward integration advantages High opearting cost structure limitsTechnical and brand support from margin expansionSABMiller

OPPORTUNITIES THREATSIncreased copper output coupled Closure of copper mineswith price recovery may stimulate Weak fiscal positiondemand for alcohol & beverages Weak Kwacha Kwacha strength Competition from imports

53

Nature of Business Zambian Breweries Plc (Zambrew) is engaged in the principal activities of producing and distributing clear beer (90% market share) and soft drinks (80% market share). Its product range includes Castle, Mosi, Carling Black Label, Eagle Lager, and Grolsch brands. Zambrew is a subsidiary of SABMiller Plc and was listed on the Lusaka Stock Exchange (LuSE) in 1998. The company has a total capacity of about 2.0m hl. FY 2011 Financial Results Overview Zambrew posted a good set of final results given that total revenue was up 19% ahead of FY 2010. The company posted total revenues of ZMK 996.2bn (USD 209.7m). Overall, volumes were up 18.0% on the back of good larger volume growth that was driven by price reductions facilitated by the reduction in the applicable excise duty from 60% to 40%. Mosi Lager, Eagle Lager and Castle Lite have been the star performers in this category, while Castle Lager has continued to show strong growth. Focus was also placed on cost efficiencies across all areas of the business which resulted in variable costs increasing as a rate less than net revenue. The combined impact of strong volumes and improved cost management yielded a 134% growth in operating profit and ultimately a profit of ZMK 45.3bn (USD 9.5m). Operational Review A reduction in excise duty providing some growth momentum. Excise duties have fallen from 75% to 60% and are now 40%. Management has indicated that this has enabled the company to pass this on to consumers, in the form of price reductions, which in turn, has significantly boosted demand for Zambrew’s products. Well positioned to meet new consumption demands. In accordance with the company’s investment strategy, the Ndola Beer facility was upgraded in September 2010 to meet expected growth in demand in Zambia. Zambrew has for the last two years invested approximately USD 125.0m in property, plant and equipment. The investment drive is premised on the expectation that the Zambian economy will continue to grow, driving consumption levels upwards, and thereby requiring investment to be made. Slow growth for the CSDs. CSD volumes have declined over the past two years, although conversely market share has risen, suggesting consumers may have been substituting CSDs for other beverages or perhaps other areas such as cell phone airtime. The company has the Coca-Cola brands as well as some of its own under the CSD business. The entry of Pepsi into the market in November 2010 is also expected to add a level of competition. The industry is also lobbying for a reduction in excise duty on CSDs of between 10% - 15%. The company has continued to expand its products portfolio and has developed and launched Oasis, a Coca Cola bottled water brand. Outlook Capex projects remain key. Having invested heavily in PPE between 2008 and 2010 and re-organised the group so as to contain costs and appropriately restructured its debt, the group’s focus in the long term will be to improve its margins. However, more investment will be required to enhance lager beer production and distribution capacity as a result of volume growth expectations. Investing in brands is a key strategy. Marketing campaigns such as Mosi Lager’s support of the national football team as well as the introduction of new brands such as Oasis water, in order to widen the range of products offered to consumers, remain a key focus area. Valuation and Recommendation Judging from FY 2011 results, Zambrew appears to have turned around and reverted to profits. At an EV/hl of USD 189/hl the counter remains one of the most expensive Southern African brewers. However, it is quite clear that Zambrew’s investment drive over the years in PPE will translate into margin expansion in the long term. HOLD


Fig 48: Copper Prices

Table 30 :Shareholder StructureSABMiller 54.0%Other shareholders 46.0%Source: IAS

Income Statement (ZMKm) F2010 F2011 % Δ

Total Revenue 837,256 996,181 19.0%Gross Profit 253,116 366,262 44.7%Operating Profit 58,637 137,135 133.9%Profit after tax (720) 45,308 6392.8%EPS (ZMK) (20) 124.5Balance Sheet (ZMKm) F2010 H1 2011 % Δ

Total Assets 820,297 985,491 20.1%NAV 436,845 680,428 55.8%Current Assets 188,049 256,368 36.3%Current Liabilities 383,452 305,063 -20.4%Current ratio 0.49 0.84Cash flow (ZMKm) H1 2010 H1 2011Operating activities (7,837) 39,251Investing activities (244,723) (11,055)Financing activities 219,649 10,798

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ZAMBREW- 5 YEAR CGR COMPARISON

31 MARCH (ZMKm) 2006 2007 2008 2009 2010 2011 2012F 2013F 5yr CAGR

Income StatementTurnover 479,847 516,371 629,742 673,086 837,256 996,181 1,185,455 1,416,619 16%COS (300,087) (345,115) (411,957) (441,571) (584,140) (629,919) (743,304) (884,532) 18%Gross Profit 179,760 171,256 217,785 231,515 253,116 366,262 442,151 532,087 9%GP Margin 37% 33% 35% 34% 30% 37% 37% 38%Distribution (49,772) (48,042) (54,051) (54,913) (91,368) (101,754) (132,280) (158,736) 16%Other - - - (73,805) (97,416) (108,490) (124,763) (162,192)Admin (45,141) (44,801) (12,706) (9,973) (16,956) (18,883) (21,716) (23,888) -22%Operating Costs (104,664) (101,730) (119,976) (138,691) (205,740) (229,127) (278,759) (344,816) 18%EBITDA 75,096 69,526 97,809 92,814 53,036 123,422 147,053 168,544 -8%Operating Profits 75,096 69,526 98,208 93,314 58,637 137,135 163,392 187,271 -6%EBITDA Margin 16% 13% 16% 14% 6% 12% 12% 12%Interest Income/(expense) (6,054) (5,813) (8,511) (19,338) (49,216) (69,511) (71,865) (75,373) 69%Income before Tax 69,042 63,713 89,298 73,476 3,820 67,624 91,526 111,898 -52%Taxation (28,352) (19,454) (29,102) (29,384) (4,540) (22,316) (30,204) (36,926) -37%Income after Tax 40,690 44,259 60,196 44,092 (720) 45,308 61,323 74,972MinoritiesAttributable Income 40,690 44,259 60,196 44,092 -720 45,308 61,323 74,972RatiosWeighted shares 364.0 364.0 364.0 364.0 364.0 364.0 364.0 364.0 EPS 111.8 121.6 165.4 121.1 (2.0) 124.5 168.5 206.0DPS 78.3 85.1 115.8 49.8 0.0 0.0 0.0 0.0Payout ratio 70.0% 70.0% 70.0% 41.1% 0.0% 0.0% 0.0% 0.0%Dividend Yield 3.0% 3.2% 4.4% 1.9% 0.0% 0.0% 0.0% 0.0%Production (m hl) 1.55 1.60 1.60 EV/hl (USD) 167.4 170.0 177.8 195.3 176.3 188.8 191.8 194.9 EBITDA margin 15.6% 13.5% 15.5% 13.8% 6.3% 12.4% 12.4% 11.9%EV/EBITDA 12.6 13.8 10.3 11.9 25.0 11.5 9.8 8.7 Growth RatiosSales growth 7.6% 22.0% 6.9% 24.4% 19.0% 19.0% 19.5%EBITDA growth -7.4% 40.7% -5.1% -42.9% 132.7% 19.1% 14.6%OP growth -7.4% 41.3% -5.0% -37.2% 133.9% 19.1% 14.6%PBT growth -7.7% 40.2% -17.7% -94.8% 1670.3% 35.3% 22.3%Earnings growth 8.8% 36.0% -26.8% -101.6% -6392.8% 35.3% 22.3%MarginsGross margin 37.5% 33.2% 34.6% 34.4% 30.2% 36.8% 37.3% 37.6%OP margin 15.6% 13.5% 15.6% 13.9% 7.0% 13.8% 13.8% 13.2%PBT margin 14.4% 12.3% 14.2% 10.9% 0.5% 6.8% 7.7% 7.9%PAT margin 8.5% 8.6% 9.6% 6.6% -0.1% 4.5% 5.2% 5.3%Effective Tax Rate 41.1% 30.5% 32.6% 40.0% 118.8% 33.0% 33.0% 33.0%EBITDA margin 15.6% 13.5% 15.5% 13.8% 6.3% 12.4% 12.4% 11.9%

55

Notes

Capital Securities Botswana Ground Floor, Exchange House Block 6, Plot 64511 Fairgrounds, Gaborone, Botswana Tel: + 267 318 8886 Cell: + 267 7 132 1421 / 7 162 4390

Imara Africa Securities Block A, Unit 3 Millennium Office Park Kgale Hill Gaborone Botswana Tel:+267 3188 710 Fax:+267 3191 767 Imara Securities Angola SCVM Limitada Rua Rainha Ginga 74, 13th Floor, Luanda, Angola Tel: +244 222 372 029/36 Fax: +244 222 332 340

Imara Edwards Securities (Pvt.) Ltd. Tendeseka Office Park 1st Floor Block 2 Samora Machel Ave. Harare, Zimbabwe Tel: +2634 790590 Fax:+2634 791435 4 Fanum House Cnr. Leopold Takawira/Josiah Tongogara Street Bulawayo Tel: +263 9 74554 Fax: +263 9 66024 Members of the Zimbabwe Stock Exchange

Imara S P Reid (Pty) Ltd Imara House 257 Oxford Road Illovo 2146 P.O. Box 969 Johannesburg 2000 South Africa Tel: +27 11 550 6200 Fax: +27 11 550 6295 Member of the JSE Securities Exchange

Namibia Equity Brokers (Pty) Ltd 1st Floor City Centre Building, West Wing Levinson Arcade Windhoek Namibia Tel: +264 61 246666 Fax: +264 61256789 Member of the Namibia Stock Exchange

Stockbrokers Malawi Ltd Able House Cnr. Hanover Avenue/ Chilembwe Road Blantyre Malawi Tel: +265 1822803 Member of the Malawi Stock Exchange

Stockbrokers Zambia Ltd 2nd Floor (Wing), Stock Exchange Building Central Park Corner Church/Cairo Roads P O Box 38956 Lusaka Zambia Tel: +260 211232455 Fax: +260 211224055 Member of the Zambia Stock Exchange

This research report is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this report may not be eligible for sale in some jurisdictions. The information contained in this report has been compiled by Imara Africa Securities (Pvt.) Ltd. (“Imara”) from sources that it believes to be reliable, but no representation or warranty is made or guarantee given by Imara or any other person as to its accuracy or completeness. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of Imara as of the date of this report only and are subject to change without notice. Neither Imara nor any other member of the Imara Group of companies including their respective associated companies (together “Group Companies”), nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Each recipient of this report shall be solely responsible for making its own independent investigation of the business, financial condition and prospects of companies referred to in this report. Group Companies and their respective affiliates, officers, directors and employees, including persons involved in the preparation or issuance of this report may, from time to time (i) have positions in, and buy or sell, the securities of companies referred to in this report (or in related investments); (ii) have a consulting, investment banking or broking relationship with a company referred to in this report; and (iii) to the extent permitted under applicable law, have acted upon or used the information contained or referred to in this report including effecting transactions for their own account in an investment (or related investment) in respect of any company referred to in this report, prior to or immediately following its publication. This report may not have been distributed to all recipients at the same time. This report is issued only for the information of and may only be distributed to professional investors (or, in the case of the United States, major US institutional investors as defined in Rule 15a-6 of the US Securities Exchange Act of 1934) and dealers in securities and must not be copied, published or reproduced or redistributed (in whole or in part) by any recipient for any purpose. © Imara Africa Securities 2011

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