Investment: South African brewer seeks pounds 200m in London

SOUTH AFRICAN Breweries, the world's fourth biggest brewer, which is moving its primary listing from Johannesburg to London next month and raising up to pounds 200m of new money to fund expansion in emerging markets, made life as difficult as possible for investors yesterday.

The pathfinder prospectus, which journalists were allowed to see but not to keep yesterday, is short on hard numbers, but long on the potential for the group once it is free to raise capital to expand outside its South African homeland.

The growth record is good. Over the seven years from 1992 to March 1998, turnover has risen by 65 per cent in real terms. Earnings per share over the same period have more than doubled to 6.01 rand (about 60p today), an average compound growth rate of 13.1 per cent, and the return on equity has averaged 17.3 per cent.

Almost 80 per cent of profits are generated inside South Africa, however, which creates a potential problems for UK investors if either inflation or exchange controls reduce the flow of earnings into sterling.

The breweries alone contribute 57 per cent. Beer consumption is rising strongly and beer itself costs 20p a pint, but SAB has 98 per cent of the local market and could itself be vulnerable to a determined push from outside competition.

Soft drinks accounted for 14 per cent of profits last year, more than half of that from the joint venture with Coca-Cola which comes up for renewal in 2007. Hotels and gaming generated 5 per cent. SAB's retail and most of its industrial interests have been sold off over the last two years and the remaining industrial holding company, PGSI, accounted for 27 per cent of turnover but only 3 per cent of profits. It is up for sale as soon as the price is right.

Brewing outside South Africa generated another 23 per cent of profits last year, but almost wholly from emerging markets in Africa and Poland, where most of the new money will be invested. There are no plans to enter the UK market.

Existing shares are being split on a two-for-one basis, up to pounds 150m worth of new shares are being placed with institutions, mainly in the UK, with a further pounds 50m in reserve, and two South African companies, JIC and Anglo- American, are selling 38 million shares between them in the hope of raising around pounds 200m.

Another South African holding company, Bevcon, has agreed not to sell any of its 28.5 per cent stake in SAB but this lock-in expires on 8 January next year.

The share price in South Africa is pounds 10.20 at the current exchange rate. It values the entire company at around pounds 4bn after the placing and after the split sets a target share price of around 500p and a possible 12 times future earnings.

But this is not necessarily a guide to a fair price in London. Less dynamic but safer rivals include Bass, on 16 times earnings, Heineken on 12 times and Carlsberg on 34 times. Something less than 500p would make the shares more attractive when dealings begin on 2 March.