Sechaba skidding on thin ice

02 Sep 2018

Sechaba Brewery Holdings Limited, through its sole associate Kgalagadi Breweries Limited (KBL), has reported lower earnings for the first half of the year on the back of the alcohol levy and deferred tax. The lower earnings are expected to continue following the restructuring of shareholding in KBL.

KBL’s profit before alcohol levy is reported at P280.8 million, up 18.5 percent from the previous corresponding period (2017 HY1) following an increase in consumption of products, up 8.2 percent in volumes. However, as usual, the profit was damped by the alcohol levy which sapped about 62.7 percent of the profit, leaving KBL with profit before tax of P104.6 million, which was still a 9.8 percent improvement from the same period last year.

Still, this increase in profit was hit the hardest by deferred tax, which is defined as the amount of income tax payable in future periods in respect of taxable temporary differences or simply tax that is payable in the future. Due to this deferred tax, KBL’s taxation for the period under review shot up threefold from P7.1 million to P28.9 million, resulting in profit after tax of P75.7 million, down 14.2 percent from the previous year’s corresponding period.

“Profit before tax improved by 9.8 percent compared to prior year, driven by increase in volume and mix and inefficiencies in the operations of the business. However profit after tax declined by 14.2 percent due to increased alcohol levy, additional deferred tax resulting from timing difference of the accounting and tax base of property, plant and equipment,” revealed Sechaba’s board in a commentary accompanying the half year results.

Sechaba’s results which are directly linked to its sole associate, KBL, inevitably tumbled. Sechaba currently holds 60 percent shareholding in KBL while 40 percent is held by AB InBev Botswana. This means from the P75.7 million profit after tax, Sechaba got P45.4 million, down by 14.2 percent. At the end, Sechaba is reporting profit after tax of P40 million for the first half year results, a 15.6 percent decrease from prior year.

Sechaba’s expected to lose out on its cash cow following the restructuring of the KBL shareholding. This follows Anheuser-Busch InBev SA/NV and The Coca-Cola Company (TCCC) reaching an agreement in principle for TCCC (or its affiliate) to acquire the non-alcoholic ready-to-drink business segment of KBL. On 3 July, the companies entered into a Master Purchase Agreement in terms of which the sellers have agreed to dispose of their interest in KBL’s business of preparing, packaging, distributing, promoting and selling non-alcoholic ready-to-drink beverages.

Sechaba together with AB InBev Africa as shareholders of KBL have a similar indirect shareholding structure in KBL’s dormant subsidiary called Beverage Manufacturers. The ownership structure of Beverage Manufactures is being reorganised from indirect to direct ownership, with KBL transferring 60 percent shareholding to Sechaba and 40 percent to AB InBev Botswana.

KBL is expected to lose about 35 percent of its income and assets due to the transfer on the non-alcoholic beverages operations to Beverage Manufacturers. As AB InBev Africa seeks to formalise its voting control of KBL and Beverage Manufacturers, it will trade its entire shareholding in Sechaba in return for part of Sechaba’s holdings in KBL and Beverage Manufacturers. The proposed transfer will see repurchase by Sechaba of AB InBev’s entire 16.839 percent in Sechaba, which represents the 10.1 percent interest in each of KBL and Beverage Manufacturers.

As a result of the share repurchase, Sechaba’s financial results in KBL and Beverage Manufacturers will reduce from 60 percent to 49.9 percent while AB InBev Africa will hold 10.1 percent of each of KBL and Beverage Manufacturers, and AB InBev Botswana will continue holding 40 percent of each KBL and Beverage Manufacturers. Under the proposed structure, AB InBev Africa will no longer hold shares in Sechaba.

Still, AB InBev Botswana will then sell its 40 percent stake in Beverage Manufacturers to TCCC and AB InBev Africa will sell its 10.1 percent in Beverage manufacturers to TCCC. In addition, AB InBev Botswana will sell its 40 percent shareholding in KBL to AB InBev Africa. When the maze of transactions is complete, AB InBev Africa will hold 50.1 percent of the issued shares in KBL and Sechaba will hold the remainder of shares in KBL, while TCCC will hold 50.1 percent in Beverage manufactures and again Sechaba will be left with 49.9 percent shares in Beverage Manufacturers.