A turn­around is brew­ing

Li­cence granted and pos­si­ble dis­tri­bu­tion deal with Heineken in off­ing

Finweek English Edition - - Business strategy - GUGU­LAKHE MASANGO

AWETHU BREW­ERIES, the long­suf­fer­ing JSE-listed bev­er­ages group, needs to shake off its lin­ger­ing hang­over and brew a con­vinc­ing re­cov­ery strat­egy be­fore the mar­ket writes the share off as an­other small cap dreg. But Awethu, whose shares have drib­bled as low as 1c on the JSE, is – de­spite its fi­nan­cial woes – at­tract­ing some at­ten­tion. And that at­ten­tion isn’t just from pen­ny­s­tock pun­ters…

Its com­peti­tor – United Na­tional Brew­eries (UNB), for­merly known as Na­tional Sorghum Brew­eries and one of SA’s largest sorghum beer pro­duc­ers – qui­etly at­tempted to ac­quire the en­tire Awethu group. But Awethu’s ma­jor share­holder re­jected UNB’s R6,5m of­fer. Tony Ford, Awethu’s MD and main share­holder, says: “The of­fer was def­i­nitely too low.” If the of­fer had been at­trac­tive, Awethu would have be­come part of a niche brew­ing com­pany that gen­er­ates more than R700m in turnover.

Some share­hold­ers may ar­gue that a spec­tac­u­larly un­prof­itable Awethu would be best tucked away in a big­ger group. But maybe Ford de­serves the ben­e­fit of the doubt – though it will be no easy task to put Awethu back on a sus­tain­able profit foot­ing. His­tor­i­cal prob­lems at Awethu have al­ready re­sulted in in­sti­tu­tional in­vestors trim­ming their com­bined in­ter­est from 20% to 9%. Those in­vestors in­clude Brait, Old Mu­tual and San­lam.

Awethu has also been plagued by fur­ther “mis­for­tunes” over the past few years. Luck­ily, last year it re­solved R7m lit­i­ga­tion against it. “That’s off our back,” says Ford, but wouldn’t elab­o­rate how it was re­solved.

A slow process in se­cur­ing a li­cence from SA’s Na­tional Liquor Board has also harmed the group. Ford says the pe­riod of ap­ply­ing for the li­cence (ie, op­por­tu­nity cost) had hurt the group more than the price paid for the li­cence.

The li­cence has since been granted, and Ford has rea­son to look for­ward to a promis­ing fu­ture. As a main share­holder, Ford is (per­haps un­der­stand­ably) con­fi­dent of turn­ing Awethu around. To build up a strong

This year the group should be able to show a profit for the last five months of its fi­nan­cial year to

end-June 2007.

and com­pet­i­tive busi­ness, Ford is per­son­ally go­ing to in­ject R1m cash into its work­ing cap­i­tal and R200 000 for equip­ment at its Van­der­bi­jl­park plant.

Says Ford: “We ex­pect to gen­er­ate R500 000/month in rev­enues. We’ll in­crease that over time.” Ford’s cash in­jec­tion would seem to sig­nal that man­age­ment is pos­i­tive about the group’s fu­ture.

Good news for Awethu is that one in­ter­na­tional com­pany is al­ready in­ter­ested in work­ing with it. The Heineken group wants to grow its brands in SA to com­pete against SABMiller and has ap­proached Awethu to dis­trib­ute its prod- ucts. “They (Heineken) ap­proached us last week,” says Ford. Both par­ties are now in dis­cus­sions to fa­cil­i­tate a dis­tri­bu­tion agree­ment.

Ford adds: “We also have a few con­tracts lined up. The busi­ness is in good shape.” He adds that this year the group should be able to show a profit for the last five months of its fi­nan­cial year to end-June 2007.

The group also says its Van­der­bi­jl­park plant is im­prov­ing and “will give im­pact to the bot­tom line”. The Awethu group em­ploys 60 peo­ple and pays around R180 000/year in JSE list­ing fees.

Dur­ing the trou­bled time wait­ing for the Liquor Board to grant it a li­cence, Ford says the com­pany didn’t re­trench any staff. “We were get­ting a bit of rental from our prop- erty to sus­tain over­heads,” he says.

De­spite Ford’s claim that the busi­ness is in good shape, a glance at the group’s his­tor­i­cal price:earn­ings ra­tio paints a dif­fer­ent pic­ture. The group, which is sit­ting on a R4m mar­ket cap­i­tal­i­sa­tion, is trad­ing at a p:e mul­ti­ple of a neg­a­tive 9,8, which re­flects his­tor­i­cal losses since 2004. Ford ac­knowl­edges that isn’t good but that “def­i­nitely the sit­u­a­tion will change”.

Hope­fully, the li­cence, Ford’s R1m for work­ing cap­i­tal plus the pos­si­ble dis­tri­bu­tion deal with Heineken will en­tice more pun­ters to take no­tice of Awethu’s po­ten­tial.

Per­haps some easy money has al­ready been made on Awethu’s new op­er­a­tional strat­egy, with the price trekking close to 10c/share at the time of writ­ing.

At that level we wouldn’t dare sug­gest Awethu’s a small cap al­ter­na­tive to gar­gan­tuan SABMiller – but it’s a damned sight bet­ter than the “priced-for-dis­as­ter” 1c/share level it was trad­ing at not so long ago.

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