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We expect AB InBev to publish negative volume growth in Q1, but organic EBITDA growth in excess of 4% thanks to mix and cost control. We are marginally above CSS. We expect no change in guidance, and management to comment that beer is a resilient category and that AB InBev can handle the current conditions. We raise our 12m TP from EUR 57.5 to EUR 65 to reflect structurally higher FCF. Its cash flow allows for more share buybacks, dividends and M&A. We already included a new SBB in our estimates. Hold maintained.
AB INBEV Anheuser-Busch InBev SA/NV
What happened? We recently caught up with ABInBev ahead of its closed period (it reports Q125 results on 8th May) to get an update on what it has been saying to investors over recent weeks. There is no change to FY25 guidance. BNPP Exane View: We felt the tone was broadly neutral with respect to organic growth in Q1 with the expected flags on technical headwinds to growth in the quarter (e.g. Easter timing and lapping of the leap year). We would not expect material revision to BBG cons. Q1 volume growth expectation (-1.9%) with some possible downward revision in North America largely offset by other regions. From a profit''s perspective, cons. USD EBITDA may be subject to modest negative revision driven by translational FX (ABI highlighted that the MXN/USD declined -17% YOY (19% of group EBITDA) and BRL/USD -15% YOY (c.15 of group EBITDA)). Points of colour below: US: Circana estimates show ABInBev''s off-trade beer vols declined -4.2% in Q1TD (to 23 Mar) vs. industry at -4.5%. ABInBev faces a potential challenging shipment phasing headwind as Q1 saw some benefit from the build up of contingent inventory. SGandA will still partially cycle wholesaler support measures but ABI has also previously stated it would increase investments in its brand to fuel growth. Mexico: In Mexico the industry faces a challenging comp. due to the phasing of government support measures last year. The phasing of Easter is particularly relevant for the market. There were no call outs related to weather nor the underling consumer environment. Brazil: The beer business faces a somewhat challenging comp. (+3.6% vols. in the base). The weather in Brazil improved sequentially in Q1 (vs. an unfavourable Q4) and recent Nielsen data shows an improvement in off-trade industry trend but still slightly soft. From a cost perspective, COGS/HL inflation in Brazil Beer will be H2 weighted (driven by transactional FX); the non-Beer business faces higher sugar prices. China: Q1 faces the...
Summary of Q4/FY24 results A strong set of FY24 results from ABInBev. While Q4 organic volume growth (-1.9% vs. co. cons. -1.3%) was a touch light, this was partly explained by a material decline in China (which itself was c.1/3rd driven by proactive inventory management). All other key group operational metrics were ahead of expectation. Q4 LFL sales grew +3.4% (co. cons. +2.4%) and Q4 organic EBITDA growth of +10.1% (co. cons. +7.7%) contributed to a c.+5% USD EBITDA beat, primarily driven by South America which lapped negative hyperinflation accounting adjustments in Argentina. FY EPS (underlying, basic) at USD3.53 grew +15.4%. FY DPS at EUR1.00 (co. cons. EUR0.91) was also materially ahead of expectation. ABInBev ended FY24 with a leverage ratio of 2.9x (ND/EBITDA), below 3x for the first time since 2015. News We highlight that ABInBev believes its US portfolio is reaching an inflection point. Earnings We revise our FY25e / FY26e / FY27e EPS estimates by +4% / +6% / +7%. Investment thesis We expect material share buybacks to drive a high-teens mid-term TSR at ABInBev. Rating and target price We maintain our Outperform rating. Our target price moves from EUR62 to EUR65. 15 questions for management There is much debate about whether overall alcohol demand in development markets is facing a headwind from accelerating moderation trends. What is your perspective on this?
BNPP Exane view As we have become accustomed to in recent history, it was a confident call from ABInBev. The company commented on technical / phasing headwinds in Q1, but this was expected and previously flagged by Staples peers. Beyond this, we noted comment on the US portfolio now reaching an inflection point and Chinese New Year being very good (with sales-to-retailers similar to 2024 but sales-to-consumers better). We expect the shares to hold their c.+8% gain today. Highlights: QandA . FCF step-up: the objective of the capital allocation is value creation and there is no change in policy. Have been articulating that the main priority is organic growth and based on the scale of the business the compounding effect of this growth is a massive value creation driver. . China: the last 2 years have seen a very soft consumer environment and geographically the Eastern part has seen more difficulties. The business has much more potential than what has been delivered for past 2 years. Saw huge execution during CNY and have been introducing innovation in the market. Want to improve execution. . US margins: important thing is that ABI is gaining momentum, and the portfolio is gaining share and accelerating with #1 and #2 share gaining brands. The main priority is to invest to ensure the portfolio continues to accelerate. . Q1 factors: 2024 was a leap year so there is 1 fewer selling day (c.-1% impact); the Easter inventory build will shift from March to April this year; in the US there is some contingency stock build in Q124; China faces the toughest comp. of the year in Q1. . Marketing and selling: ABI looks at ratios (MandS expense to sales) but is not guided by them. Important to highlight the portfolio focus on the megabrands. Have massively elevated game on data so can target better and be agile with the resources. During SuperBowl week ABI''s share in the US accelerated in both the off and on premise. . COGS outlook: 2025 is looking like a normal year...
Q4-24 volume growth missed expectations, but thanks to good revenue management and cost control, organic revenue and EBITDA growth exceeded expectations. Leverage down to 2.9x thanks to strong FCF. Company raised dividend from EUR 0.82 to EUR 1.00 p/sOutlook in line with expectations, but the lower than expected guidance in capex allows for higher FCF estimates. Based on the Q4-24 results and outlook we expect to only finetune our estimates. We maintain our Hold rating.
BNPP Exane View Q4 organic volumes are a touch light but this is partly explained by a material decline in China (which itself was c.1/3rd driven by proactive inventory management) and all other key operational metrics are ahead of expectation. Q4 USD EBITDA is a c.+5% beat and we expect consensus FY26 earnings estimates to be subject to similar (c.+4-5%) upward revision. We call the shares up moderately (could be more given the reactions we have seen to other beats in Beverages recently). Q4 Headline metrics . LFL: +3.4% (co. cons: +2.4%) . Vol: -1.9% (co. cons: -1.3%) . Rev./HL: +5.5% (co. cons: +3.7%) . Sales: USD14,841m (+4.7% vs. co. cons.) . EBIT: USD3,824m (+5.7% vs. co. cons.) . EBITDA: USD5,245m (+5.1% vs. co. cons.) . LFL EBITDA: +10.1% (co. cons. +7.7%) . EBITDA margin (%): 35.3% (co. cons. 35.2%) . EPS (basic, underlying): USD0.88 (+23% vs. co. cons.) . FY DPS: EUR1.00 (co. cons. EUR0.91) Q4 Top-line drivers Scanning the top-line drivers by region, we note that the Q4 LFL sales beat (+3.4% vs. co. cons. +2.4%) was led by North America (+1.7% vs. co. cons. +0.5%), Middle Americas (+6.6% vs. co. cons +4.3%) and EMEA (+8.7% vs. co. cons. +6.1%), all driven by better volume and price/mix. This was partially offset by softer-than-expected trends in Asia Pacific (-10.9% vs. co. cons. -7.0%), impacted by inventory management in China and continued weak on-trade demand, and South America (+3.2% vs. co. cons. +4.2%) driven by weaker volumes. Note: US LFL sales grew +0.8%. STRs grew +0.5% (outperforming the industry). STWs declined -1.7%. Q4 Bottom-line drivers . EBITDA margin: +160bp YOY (+216bp LFL). . EBIT margin: +160bp YOY (+199bp LFL) which reflects GM +140bp (+153bp LFL); SGandA +30bp; and other op. income -10bp. . By region, we note that the +5.1% USD EBITDA beat in Q4 was driven by South America (+23% vs. co. cons.) and EMEA (+6.2% vs. co. cons.), more than offsetting a miss in North America (-7.6% vs. co. cons.) Other . BEES: USD49bn...
We have adjusted our estimates to reflect changes to our FY24-26e estimates and updated FX translation. We do not consider the changes to be material; our rating is unchanged.
In recent months, the USD has strengthened significantly vs. almost all of AB InBev's most important currencies. The negative translation has a direct impact on our estimates, which could get worse by transactional and macro impact. In addition, it also slows the deleveraging process. Based on this we have substantially reduced our estimates.We see no reason for a re-rating despite the historically low valuation. Assuming multiples to remain stable on a 12m basis we arrive at a TP of EUR 57.5 vs. EUR 68 previously. We cut out rating from Buy to Hold.
Investors are concerned that ABI could return to old habits With ABInBev set to return to c.3x ND/EBITDA this year, investors are concerned that ABI could return to old habits. We consider potential implications of the largest acquisition options left in beer. Castel (Africa) While it is far from clear that Castel would be for sale, even after 98-year-old Mr. Pierre Castel passes, we believe ABI is the best placed potential acquiror and there is a strong strategic rationale for a combination. We estimate a valuation of c.USD9.5bn for 80% of Castel (Beer and Soft drinks). ThaiBev''s ''BeerCo'' (Thailand and Vietnam) We suspect ABI could have interest in ThaiBev''s ''BeerCo'', principally driven by the majority (54%) stake in SABCEO (the Vietnam brewer) held within it. While ThaiBev only appears open to a sale of a minority stake in ''BeerCo'', we estimate the value of the entire business at c.USD3.7bn. Looking for other potential options in Asia, we see attractions in San Miguel Brewery (Philippines), but suspect ABI would face stiff competition from Kirin (already 49% owner) if SMB ever became available. An anti-consensual view While from a market sentiment perspective we would prefer capital to be returned, thinking long-term we see strong strategic sense in ABInBev acquiring any of the aforementioned assets. Putting debate about ABI''s use of cash to one side, the business is in good health Given the lack of large acquisition candidates in beer (even Castel would only add an est. c.0.4x to ND/EBITDA) and ABI''s prodigious cash generation (CY25e FCF yield 8.5%), we believe bigger share buybacks are a question of when rather than if. Capital allocation debate aside, our key takeaway from our recent CEO / CFO roadshow is that the business is in good health with upside potential from the growth of the digital platforms. We re-iterate our Outperform rating and EUR65 target price.
Summary of Q324 results ABInBev Q3 LFL sales growth at +2.1% was a -130bp miss vs. co. cons. The miss was driven by volumes (-2.4% vs. co. cons. -0.4%) while LFL rev./HL growth was ahead of expectation (+4.6% vs. co. cons. +3.9%). By region, the primary sources of the LFL sales miss were the Middle Americas and Asia Pacific where China Q3 LFL sales declined -16.1% (vols -14.2%) and EBITDA -21.1%. Q3 volume growth in North America (-0.4% vs. co. cons. -2.2%) was ahead of expectation but was arguably flattered by an additional selling day in the quarter. Turning to profits, Q3 LFL EBITDA growth at +7.1% was a small miss (co. cons. +8.6%) but USD EBITDA was c.-5% miss. Q3 EPS (basic, underlying) at USD0.98 was a c.+7% beat (driven by lower finance costs and tax). News We highlight that ABInBev announced a USD2bn share buyback to be completed over the next 12 months. Earnings We revise our FY24e / FY25e / FY26e EPS estimates by -2% / -7% / -7%, roughly driven half by reduction to organic profit growth forecasts and half by updated FX. Investment thesis We expect material share buybacks to drive a mid-teens TSR from FY25 at ABInBev. Rating and target price We maintain our Outperform rating. Our target price moves from EUR69 to EUR65. 15 questions for management Should we interpret the announcement of the USD2bn with Q3 results as the limit of share repurchase activity over the next 12 months?
Q3-24 volumes missed expectations, primarily due to a very weak China and Middle America. Adj EBITDA missed CSS expectations in absolute and organic growth. Guided EBITDA range was narrowed to 6-8% growth. A USD 2bn share buyback was announced. Based on todays'results we expect EBITDA est. to come down by some 1%. We maintain our Buy rating keeping our 12m TP unchanged at EUR 68.
On October 31, AB InBev will publish its Q3 results. We expect another solid quarter with organic EBITDA growth at the higher end of the range and the company being on track for some 8% for the full year. We do not expect the company to raise its guidance. However, we believe that they have room to announce another SBB or alternative. We maintain our Buy rating, lifting our 12m TP from EUR 64 to EUR 68
We have adjusted our estimates for operational tweaks and updated FX. We do not consider the changes to be material; our rating and target price are unchanged.
We expect the end of 2024 to be a landmark moment for ABInBev We believe the end of 2024 will mark an important moment for ABInBev for, after a protracted deleveraging journey, we expect its Net Debt/EBITDA to return 3X for the first time since 2016. The stock will become much more difficult to ignore, what can investors expect to find? In recent years we believe many long-only investors have been able to (largely correctly) ignore ABInBev given high leverage. But the stock is a large part of the index (market cap. EUR100bn). As these investors re-appraise being underweight ABInBev, we assess what they can expect to find: A digital leader in Beverages firmly focussed on organic growth ABInBev has moved from a strategy that was acquisition-led to one firmly focussed on LFL growth and is now widely viewed as the Beverages digital leader. Material share buybacks from 2025 While ABInBev could (in theory) engage in share buybacks (SBB) of c.USD13bn per annum and hold ND/EBITDA at 3x, we believe it will want to continue gradually deleveraging. We now include SBBs of USD8bn per annum from 2025, equating to c.6.3% of the current market cap. An inexpensive stock On CY25e, the stock trades on 16.3x P/E, 8.6x EV/EBITDA, 11.4x EV/EBIT and an 8.8% FCF yield. We upgrade ABInBev to Outperform, acknowledging near-term Altria placement risk Combining SBBs (c.6%), dividend yield (c.2%) and net profit growth (c.10%) we therefore expect the stock to generate at least a high-teens TSR. ABInBev becomes our most preferred stock in Beverages and we upgrade to Outperform (TP raised to EUR69 from EUR62). We are acutely aware that upgrading ABInBev on the day Altria''s lock-up expires is a risk (we explore potential implications within). We would view any weakness on a placing as a buying opportunity.
Summary of Q224 results Q2 LFL sales growth at +2.7% (vol. -0.8%) was an -80bp miss relative to company consensus (primarily driven by APAC). While Q2 EBITDA at USD5.3bn was broadly in-line (+0.4% vs. co. cons.), LFL EBITDA growth at +10.2% was a +190bp beat driven by strength in North America (+13.8% vs co. cons. +2.3%) and South America (+21.7% vs co. cons. +13.4%). We note that LFL EBITDA in the US grew by +17.5% in Q2 driven by productivity initiatives and SGandA efficiencies as ABInBev laps the Bud Light issues it faced last year. Q2 EPS at USD0.90 was +6% ahead of co. cons. News We highlight that, while ABInBev is happy with what it has done so far, it believes there is much more to be done on US productivity improvements. Earnings We revise our FY24e / FY25e / FY26e EPS estimates by +1% / -2% / -2% (driven primarily by FX). Investment thesis There is a lot to like about the cash return story at ABInBev, but we see more re-rating potential at Heineken and Carlsberg. Rating and target price We maintain our Neutral rating. Our target price moves from EUR63 to EUR62. 15 questions for management Given sequentially easier comps in Q3/Q4, are there any factors to consider which would lead us to believe LFL EBITDA growth in the US will not accelerate from the +17.5% achieved in Q2?
Q2 results were solid, perhaps a little light on top line compared to CSS, but there was a beat on organic EBITDA growth. In addition, despite the share buyback, deleveraging continued to 3.4xWith 7.8% organic EBITDA growth in H1, market may be somewhat disappointed the company maintaining its outlook. However, based on the H1 EBITDA we believe company is on track for the high end of expectations or aboveWe reiterate our Buy rating with a 12m TP of EUR 64
On August 1, AB InBev will publish its Q2-24 results. We are somewhat below CSS, but still expect a solid quarter. We have two key questions for AB InBev: 1. Will it already raise the guidance, now CSS for organic EBITDA growth is above the guided range. 2. Will it announce another SBB. Our view: if not this quarter, we expect both to be announced next quarter, although for an SBB the company has attractive alternatives to create value.Given the strong earnings growth and potential value enhancing actions we reiterate our Buy rating. TP unchanged at EUR 64.
We have adjusted our estimates for modest operational changes as well as updated FX. Our target price moves from EUR64 to EUR63. We do not consider the changes to be material; our rating is unchanged.
In recent week, most currencies weakened vs the USD. Especially, the MXN depreciated. With Mexico, together with the US, being AB InBev's largest EBITDA contributor, the impact on EBITDA and consequently EPS is significant. The lower estimates have also a small impact on leverage.For the time being we have assumed only the translation effect, but there could be a negative transaction impact in 2025, which has to absorbed by pricing. Based on our reduced estimates, we lower our 12m TP from EUR 68 to 64. Buy reiterated.
Summary of Q124 results ABInBev Q1 LFL sales grew +2.6%, in-line with consensus expectation. Volumes declined -0.6%, modestly ahead of co. cons. (-1.0%). LFL EBITDA grew +5.4%, ahead of co. cons. at +1.9%, with the beat driven by North America (-16.6% vs. co. cons. -23.9%) and EMEA (+35.1% vs. co. cons. +9.6%). Q1 Normalized EBIT at USD3.64bn was +3.7% ahead of co. cons. which contributed to a +17.7% beat at underlying EPS (driven primarily by a combination of amplification of the EBIT beat at EPS and lower finance costs). News We highlight that while volume trends for the US beer industry in early April were slightly worse than in Q1, this was likely primarily driven by a combination of Easter timing and colder weather YOY. Earnings We revise our FY24e / FY25e / FY26e EPS estimates by c.+4% / c.+3% / c.+3%, reflecting a combination of the Q1 beat and modest upward revision to our operational estimates. Investment thesis There is a lot to like about the cash return story at ABInBev, but we see more re-rating potential at Heineken and Carlsberg. Rating and target price We maintain our Neutral rating. Our target price moves from EUR62 to EUR64. 15 questions for management In what scenario do you envisage being at the bottom-end of your +4-8% LFL EBITDA growth guidance for 2024?
• Q1 24 results exceeding expectations, with a good performance in most regions with stable to higher market shares• EBITDA increased by 5.4% organically, providing confidence that FY growth will land at the higher end of the 4-8% range, or even above. Hence, we expect consensus EBITDA estimate to rise by 1-2% based on these numbers• We reiterate our Buy recommendation and 12m TP of EUR 68
We have adjusted our estimates ahead of ABInBev''s Q124 results to reflect minor changes to operational estimates for FY24. We do not consider the changes to be material; our rating is unchanged.
Altria announced to reduce its stake in AB InBev from approx. 10% to 8% through a secondary global offering. AB InBev will buy back some USD 200m or some 9% of the placement.We are pleased that Altria starts to take away the overhang. However, we would have preferred this at a later moment, allowing AB InBev to buy back a bigger part of the shares instead of 9%. In addition, Altria could return after the 180 days lock up. We maintain our Buy rating but given short term uncertainty we take AB InBev out of our preferred list
Summary of Q4/FY23 results ABInBev Q4 LFL sales grew +6.2% (co. cons. +6.1%) and LFL EBITDA also grew +6.2% (co. cons. +5.3%), both modestly ahead of expectations. Q4 LFL volumes declined -2.6% (co. cons. -2.0%) with the miss relative to expectation primarily driven by North America, where shipment phasing in the US was unfavourable in the quarter. Q4 USD EBITDA was c.-6% below co. cons. primarily driven by South America which was impacted by devaluation of the Argentinian peso in December. Q4 underlying EPS at USD0.82 was a c.+9% beat (driven by favourable tax). FY DPS was EUR0.82. News We highlight that ABInBev''s FY24 group effective tax rate guidance reflects the full impact of legislation passed as of today (including in Brazil). Earnings We revise our FY24e / FY25e / FY26e EPS estimates by c.-4% / c.-3% / c.-2%, reflecting a combination of revised operational assumptions, FX, finance costs and tax. Investment thesis There is a lot to like about the cash return story at ABInBev but we see more re-rating potential at Heineken and Carlsberg. Rating and target price We maintain our Neutral rating. Our target price moves from EUR63 to EUR62. 15 questions for management Does Altria owning a c.10% stake in ABInBev factor into your thinking when considering how to implement your dynamic capital allocation policy?
Volumes and absolute EBITDA figures came in below expectations, organic growth figures exceeded. Bud Light and Argentina hyperinflation had a large impact on the results. Deleverage continued, but dividend proposal is below expectation. Outlook for EBITDA growth of 4-8% in 2024 is line and there is room to exceed. However, given slightly lower base we expect estimates to come down marginally. Buy and TP of EUR 68 maintained.
Q4 results to be depressed by the Bud Light saga and Argentine peso devaluation. Nevertheless, we expect full year organic EBITDA growth of 6.5%, in line with the company's guidance. Given the ongoing deleverage we foresee dividend to be raised from EUR 0.75 to EUR 1.00 We reiterate our Buy rating as we are very optimistic on the earnings growth for 2024 and 2025 further deleveraging the company. However, as it is early in the year, with market condition still challenging and Bud Light still being depressed, we expect AB InBev to stay within its medium-term guidance of 4-8% EBITDA growth.
Reasons commonly given to avoid ABInBev: it is highly levered; it has EM focused profits and DM focused debt; Bud Light US will not recover; it will return to the acquisition trial. What if... What if ABInBev were not highly levered, what if the Fed were on the verge of a pivot (driving more EM FX appetite), what if consensus already assumes Bud Light US does not recover, what if consolidation has played. What if ABInBev started to return its prodigious FCF to shareholders...
Summary of Q323 results EBITDA at USD5,431m was +2.1% ahead of co. cons. and EBIT at USD4,027m was +0.8% ahead of co. cons. As to the LFL development, we note that ABInBev reported +5.0% LFL sales growth reflecting a -3.4% volume decline and +9.0% rev/hl growth. Excluding Argentina, Q3 LFL sales would have grown by +1.6%. LFL EBITDA grew by +4.1%. Basic underlying EPS at USD0.86 was +1.6% ahead of co. cons. News We highlight that ABInBev commented that its value share losses in the US are showing some signs of recovery. Earnings We make relatively modest adjustments to our earnings estimates. Investment thesis We believe that the market will slowly come to positively view ABInBev as a large cash return generator. Rating and target price We maintain our Outperform rating and EUR64 target price. 15 questions for management Argentina is materially distorting the LFL performance of the group, why not embrace the price-capping practice that is embraced by most of your European staples'' peers?
Unlike the Carlsberg report, ABI’s Q3 gave us something substantial to sink our teeth into. Although volumes failed to meet the street’s expectations, primarily due to the Bud Light backlash, this is not what we would emphasize. The announcement of the share buyback was welcomed by investors. As highlighted in our latest teaser about the company, reverting to a net debt to EBITDA ratio of 3.0x would undoubtedly bring a big smile to investors’ faces.
Q3 volumes were weaker than expected but EBITDA and EBITDA growth exceeded expectations illustrating again the resilience of AB InBev's portfolioBased on YTD EBITDA growth guidance seems conservative. AB InBev also announced a USD 1bn SBB and USD 3bn buy back of bonds. We expect to raise our 2023 EBITDA estimates by some 3 to 4%As results confirm our investment case, we reiterate our BUY rating and TP of EUR 64, based on 21x P/E and 10.5x EV/EBITDA (2024E)
A miss on volume (down organically by -3.4% vs. -2.3% for consensus), but a beat on the bottom line (organic EBITDA up by +4.1% vs. +0.3% expected), while the top line came in roughly in line with market expectations (up by 5.0% organically). The company maintained its FY23 outlook. With the consensus already at the lower end of the company guidance for FY23, this announcement is not a surprise. However, we would appreciate a contraction in the guidance or further information.
• At the CMD in Mexico, management gave in-depth presentations on its strategy based on 3 pillars: 1) lead and grow the category, 2) digitize and monetize the ABI ecosystem and 3) optimize its business. • This confirms that ABI is in growth mode again re the top line and it confirms our positive stance on the investment case.• We reiterate our Buy rating and TP of EUR 64, which values ABI at 20x earnings and 10.5x 2024 EV/EBITDA.
Consumer demand for ABI’s brands has remained strong in Mexico, Colombia, Brazil, Ecuador, South Africa and China. ABI also outperformed a soft beer market in Europe during Q2. This is evidence of the company’s strong portfolio of brands as well as good execution. In the US, ABI lost market share as a result of the consumer backlash against Bud Light, but management pointed out that the business held its new lower level of market share steady over May and June, which suggests the worst of the backlash is behind them. The premiumisation trend continues to be strong in nearly every market with group revenue/hl growth of 9.0% in Q2 (and 10.6% in H1). The above core portfolio grew revenue by over 10% in Q2, which is c. 300bps faster than the ABI group average. The global brands (Budweiser, Corona, Stella Artois) grew revenue by 18.4% outside their home markets in Q2. This bodes well for ABI’s growth algorithm and for its margins. Net debt/EBITDA was 3.7x at the end of June 2023, a slight uptick from the December 2022 level, but this reflects normal working capital seasonality (plus some capex phasing) and is expected to come down again in H2. We model 2.8x by the end of FY23E and assume a FY dividend of €1.00/share. We cut our underlying basic EPS by 7% in FY23E to $3.07 (Bloomberg consensus $3.05) and by 3% in FY24E to $3.70 (Bloomberg consensus $ 3.57). Most of this is due to higher finance expense with c. 2% of the downgrade attributable to less ambitious organic growth assumptions (previously we were slightly ahead of guidance). Our €70 TP is unchanged and implies 22.0x FY23E PE. This is at the upper end of the FY1 PE range over the last 5 years but is in-line with the last 10-year average FY1 PE. As ABI’s results demonstrate the attractiveness of its diversified footprint we think it can regain its former rating.
Summary of Q223 results Q2 LFL sales growth at +7.2% was c.80bp ahead of co. consensus driven by a rev/hl. beat (+9.0% vs. co. cons. at +7.9%). The volume decline at -1.4% was in-line with co. cons. expectations. While LFL EBITDA growth at +5.0% was 460bp ahead of co. cons, the absolute EBITDA delivery at EUR4,909m was only +1.1% ahead due to FX (South America being the culprit). Basic underlying EPS at USD0.72 was 7.4% ahead of co. cons. News We highlight that ABInBev''s US market share has been relatively stable since late April. Earnings We revise our FY23e-FY25e EBITDA by -1% to -2%. Investment thesis We believe that investors will gradually start to accept that the Bud Light situation does not continue to pose material downside to ABInBev consensus and hence have more confidence in playing the stock. Rating and target price We maintain our Outperform rating. Our TP moves from EUR64 to EUR65 reflecting our estimate revisions and recent minority valuation / FX moves. 15 questions for management Excluding Argentina, do you anticipate that FY LFL EBITDA growth will still be in the +4-8% range;
No negative surprises from the Q2 results. On the contrary, the expected weak performance in the US after the Bud Light backlash was offset by resilience elsewhere. Pricing was highlighted as a positive factor and the FY guidance was reiterated. Increasing volumes in the US is crucial to boosting profit margins. We want to emphasize once again that, given the recent drop in the share price, investors may view this as a chance to invest in a stock with solid fundamentals.
Results were broadly in line with expectations with organic EBITDA growth beating, but absolute figure in line. Most important, company maintained its guidance of organic EBITDA growth to be within the 4-8% rangeBased on the Q2 results we expect to only fine tune our estimates, but expect the share price to react positively todayWe reiterate our Buy rating with a TP of EUR 64
• On August 3, AB InBev will publish its Q2-23 results, which are heavily impacted by the Bud Light saga. Question mark will be whether AB InBev will maintain its FY23 guidance. CSS expects 4.4% growth EBITDA growth, we 3.3% • No matter the exact impact, the market has taken the view of a structural adverse USD 1.2bn EBITDA impact. In our view this is more than reflected in current valuation. Hence, we maintain our Buy rating, but lower our TP from EUR 68 to EUR 64 to reflect our lower estimates and as the market needs time to digest
There is little sign of Bud Light improving We had assumed that the US furore surrounding Bud Light''s association with the transgender influencer Dylan Mulvaney would quickly pass, it shows little sign of doing so. Bud Light appears to have found itself at the heart of the US culture wars and a conduit for views at both ends of the spectrum. The longer that the situation persists, the likely more difficult it will be to resolve. A Bud Light inflection appears to be the principal trigger to buyside action The above observation matters given that the prevailing buyside view on ABInBev is that it is inexpensive (even if one aims somewhat below current consensus estimates), but until there is a positive inflection in Bud Light trends, the stock will struggle to gain traction. We see material downside to North American consensus EBITDA estimates We have utilised various sources to construct a detailed US model to try and reflect the likely financial implications of continued weakness as best we can. The bad news is that we materially reduce our FY23e North American EBITDA and now look for a -23% LFL decline (vs. our previous estimate / VA consensus at -11% / -9%). Primarily as a consequence of this, we reduce our FY23e group EBITDA by -3%. Ironically, we believe reduced hopes for a Bud Light inflection could trigger a stock recovery Notwithstanding North America, the broader group picture does not look so bad. Our revised group FY23e/FY24e EBITDA is only -3%/-2% below VA consensus. Furthermore, we still believe that the bottom-end of ABInBev''s FY23 LFL EBITDA guidance (+4-8%) is obtainable...just. Ironically, as investor hopes for a Bud Light inflection start to fade (we believe this is already happening), we believe that the stock should become more actionable (there no longer being anything to wait for). Keeping this in mind, we maintain our Outperform rating. ABInBev is an inexpensive stock on most common staples'' valuation metrics and as with...
ABI Q1 results represent a beat vs expectations at a number of levels. We highlight, in the first instance, the organic volume and sales trends vs key peer Heineken (Not Rated): for the first time in six quarters, ABI’s 13.2% sales growth beat Heineken’s 8.9% in Q1 and its 0.9% volume growth was ahead of Heineken’s -3%. The challenged US business continued to lose share, but top line is in growth thanks to ongoing premiumisation trends (revenue +4.0% but STWs -1.6%, STRs -3.0%). Other divisions generally delivered robust top-line performance that was ahead of expectations, with Asia very strong off an admittedly low base. Management has chosen to leave FY23 guidance unchanged (4-8% organic EBITDA growth) despite the significant beat in Q1. The broader macro environment and inflation were reasons cited, but we sense forecast risk now lies to the upside. We are somewhat surprised at the initially muted reaction of the shares yesterday as we believe consensus is likely to move to the top of the 4-8% range (currently consensus is at +5.6% for FY23E).
Summary of Q123 results On a reported basis, a strong start to the year for ABInBev with EBITDA at USD4,759m coming c.3.7% ahead of co. consensus. While on an organic basis LFL sales and LFL EBITDA growth were both materially ahead of consensus, the development was rather flattered by exceptional inflation in Argentina. For example, while LFL sales growth at +13.2% was c.330bp ahead of co. consensus, excluding Argentina, it would have been +9.1%. As to an important metric that was not boosted by Argentinian inflation, we note that volume growth was +0.9% vs. co. consensus at +1.0%. News We highlight that ABInBev commented that over the past 3 weeks the impact of the US Bud Light situation has been ~1% on global volumes. Earnings We revise our FY23e-FY25e EBITDA by +1-2%. Investment thesis While there are many sceptics on the name, with leverage quickly reducing and FY24 looking much better from a cost perspective, we believe ABInBev is open to positive reappraisal. Rating and target price We maintain our Outperform rating. Our TP moves from EUR65 to EUR71 reflecting our estimate revisions and recent sector / market re-rating. 15 questions for management Given inflation in Argentina, your LFL sales / EBITDA metrics are increasingly becoming a less useful guide to the ''real'' organic performance of the business, do you have any plans to exclude Argentina?
Notwithstanding the prevailing macro-economic headwinds and associated cost pressures, ABI demonstrated a Q1 23 performance that exceeded expectations. Prices have been growth’s engine driver while volumes are suffering. Management sought to reassure on the Bud Light case.
AB InBev had a good start to the year with EBITDA growth of 13.6%. This good start raises the question whether AB InBev could raise its guidance Based on today's results we expect to raise our estimates towards the upper end of the range. CSS is already at 7.4%We reiterate our Buy rating. AB InBev is part of our preference list
Q1 Consensus expects a 5.6% EBITDA growth, but we expect all focus to be on Bud Light sagaAlbeit early, quick and dirty we expect a worst case impact of some USD 250m on EBITDA or slightly more than 1%. Hence, this could turn out to be a nice entry point. To reflect the impact we have lowered our EBITDA estimate by some USD 125mWe maintain our Buy recommendation.
Summary of Q422 results EPS aside, Q422 results were generally below co. consensus expectations. LFL sales growth at +10.2% was -0.8% below co. consensus with a +2.1% revenue/hl beat failing to offset a -2.7% volume miss. To contextualise the latter, we note that Carlsberg posted a -90bp volume miss in Q4 and Heineken posted a -1.2% volume miss in Q4. While LFL EBITDA growth at +7.6% was +50bp ahead of co. consensus, reported EBITDA at USD4.9bn was -2.2% below, with this miss being principally driven by weakness in Asia Pacific. Underlying EPS at USD0.86 was materially (+18.7%) ahead of co. consensus primarily due to an unusually low tax rate (12.2%). News We highlight that Bud APAC commented that in China, restaurant and nightlife channels have almost fully re-opened by the end of February, hence it is optimistic about business recovery in FY23 following a transitional quarter in Q1. Earnings We revise our FY23e/FY24e/FY25e EPS by c.(3)-(4)% as a consequence of a modest EBIT revision (c.(1)%) being amplified by increased net finance cost estimates. Investment thesis While there are many sceptics on the name, with leverage quickly reducing and FY24 looking much better from a cost perspective, we believe it is open to positive reappraisal. Rating and target price We maintain our Outperform rating. Our TP moves from EUR66 to EUR65. 15 questions for management Does deleverage remain your overwhelming priority at present, or would you conceptually have interest if Altria were to seek to exit some of its c.10% stake?
A mixed set of results marked by a higher decline in volume than had been expected in the Q4. We expect no major earnings increases following this report given that the consensus already stands at the high end of the company’s FY23 guidance range.
• Q4 results were mixed with volumes missing across most regions, compensated by stronger than expected price mix. This also resulted in a marginal beat in organic EBITDA growth, although the absolute was in line with our estimate.• Main surprise: AB InBev raised its dividend by 50% to EUR 0.75 p/s. • Based on the results and outlook we expect to finetune our estimates.• We reiterate our Buy recommendation with a 12 month's TP of EUR 68
Summary of Q322 results LFL sales, volumes and EBITDA were all modestly ahead of co. consensus expectations. To be more specific, LFL sales growth was +12.1% (co. cons: +10.2%) reflecting +3.7% volume growth (co. cons: +2.2%) and +8.0% rev/hl growth (co. cons: +7.8%). From a geographical perspective, South America was a particular standout with +27.0% LFL sales growth (co. cons: +20.2%) driven by pricing (+23.4%). EBITDA at USD5,313m was c.0.8% ahead of co. consensus and LFL EBITDA growth at +6.5% was +1.3% ahead of co. consensus. News We highlight that ABInBev is very enthused on the activation plans in place for the forthcoming first Southern Hemisphere summer FIFA world cup. Earnings We revise our FY22e by c.(1)%. Our FY23e and FY24e EPS are revised by (2)-(3)% as a consequence of both FX and an increase in estimated finance costs. Investment thesis ABInBev is inexpensive and is relatively underweight in Europe which is the region that we worry about most from a consumer trends perspective. Rating and target price We maintain our Outperform rating. Our target price moves from EUR61 to EUR60. 15 questions for management You appeared somewhat more confident on this call than you have done over previous quarters, what is the basis for this?
º Q3 revenue growth of 12.1% and EBITDA up 6.5% Outlook increased
ABI outperformed its peers, even beating expectations, and this is rare enough to be noted. Although the environment is not the most conducive, it may be time to recognise the group’s worth.
Revising our operational assumptions With this report we make relatively modest changes to our operational estimates to reflect both revised organic growth and FX assumptions. The net result is a c.-2% reduction to our EBITDA in FY22e, FY23e and FY24e. Revising our financial assumptions We have also revised our ''financial'' assumptions to reflect a higher interest environment. While ABInBev''s bond portfolio is primarily (c.94%) fixed rate, we suspect that the higher interest rate environment will likely weigh on other financial costs such as transactional FX hedging. As a consequence of incorporating revised estimates in this area with the aforementioned operational revisions, we revise our earnings for FY22e, FY23e and FY24e by c.-5% to -7%. We revise our target price from EUR63 to EUR61 We have previously argued that ABInBev should be valued on c.13.5x 1/2 FY23e + 1/2 FY24e EV/EBIT. While we maintain this valuation methodology, in light of our estimate revisions, we revise our target price from EUR63 to EUR61.
Summary of Q2/H1 22 results Q2 LFL sales growth at +11.3% was ahead of co. consensus (+9.5%) driven by better-than-expected volume growth at +3.4% (co. cons +1.9%), as stronger South America volumes were partially offset by supply issues in South Africa. Turning to the bottom-line, LFL EBITDA growth of +7.2% came in ahead of co. consensus (+5.6%), however excluding the benefit from one-off Brazilian tax credits, Q2 absolute EBITDA trailed consensus by -2%. News We highlight that ABInBev has yet to see any sign of deceleration in Beer trends across its markets. Earnings We revise our FY22e/FY23e/FY24e EPS by c.-1.0%, +0.5% and +0.8% respectively. Investment thesis While ABInbev is relatively inexpensive, within Beverages we retain our longstanding preference for the Spirits sub-category. Rating and target price We maintain our Neutral rating; our target price moves from EUR54 to EUR58 (primarily relating to the 6-month roll-forward of our target profits). 15 questions for management You mentioned that during periods of economic pressure, consumers have often downtraded from more premium alcohol categories into premium beer, are you seeing this take place across any of your markets?
Once again ABI seems to have been unfairly punished (-4% at midday). The small beat was not “enough” compared with the larger beats of the majority of staples in Q2, coupled with “just” a reiteration of guidance which the market did not like. On our side, we note a good performance in H1 and a group that remains on the course despite the complicated environment.
AB INBEV - BUY | EUR65(+22%) When high debt is no longer a liability Ever since the acquisition of SABMiller, AB InBev’s debt levels have been a worry for investors, reflected in a higher risk premium and lower valuation. However, in the current high-inflation environment, AB InBev’s debt is a significant source of value creation. While inflation increases top-line and profit figures, it decreases the value of debt. And no other beverages company has the same high debt levels as AB InBev (net debt/EBITDA of 4.0x). However, with an average duration of 16 years and 93% at fixed rates, the company can easily fulfill its debt obligations. In the next 10 years it needs to pay back on average USD2.9bn p.a. compared to an annual free cash flow of over USD10bn. Furthermore, with rising interest rates, AB InBev has the option to buy back debt at significant discounts. On top of that, the currency mismatch (33% of debt is in euros compared to only 4% of revenues and profits) should play to its advantage.
Sector pricing up to protect margins We reflect on ABI’s Q1 results in the context of the broader consumer staples universe and note that a sharp acceleration in price inflation (ahead of market expectations) is the dominant theme. It is apparent to us that every consumer staples group is exercising maximum discipline in regard to revenue management in an effort to preserve margins. This includes more frequent price increases, in some cases more than twice a year even in markets which historically experienced price deflation. We remain positive on the long-term prospects for the stock (key reasons: emerging market exposure that drives robust top-line growth, strong momentum in regard to BEES efficiencies, declining leverage, and fixed-rate, long-duration debt profile), and do not anticipate making meaningful changes to our estimates. We forecast FY22E organic sales growth close to 10% (Q1: +11.1%), and that margin recovery will gather momentum in H2 and into FY23E. Brewers have form with pricing In the charts on the following pages, we highlight the price/mix component of selected global consumer staples names that we follow (where disclosure allows) and show that an index of quarterly price/mix improvements reached a multi-decade high in Q1 of 2022. Our brewer index (average of ABI and Heineken) reflects a 10-year organic sales CAGR of 4.1% (ABI: 5.1% and Heineken: 3.1%). If we stretch this back 15 years, the growth rate rises to 5%. However, average volume growth through this period has been between 0% and 1%, meaning that the heavy lifting has been done by price/mix improvements. If anything, this phenomenon will be amplified this year and next. In the consumer staples context, pricing is being led by LatAm in the emerging markets context and by the US in the developed markets context. Overall sales growth rates are rising faster in emerging markets vs developed markets, led by the acceleration in inflation.
Summary of Q122 results Post buoyant peer reporting, it was not a great surprise that Q122 LFL sales growth at +11.1% (volumes +2.8% and rev/hl +7.8%) was materially ahead of consensus (co. cons: +7.6%). EMEA (+24.1% LFL vs. co. cons. at +13.7%) and South America (+24.5% LFL vs. co. cons. at +13.8%) were the principal sources of the beat. Turning towards the bottom-line, EBITDA grew by +7.4% on a LFL basis (co. cons: +4.6%) and was +1.6% ahead of co. cons. on a reported basis. Underlying basic EPS at USD0.60 was in-line with co. consensus. News We highlight that marketplace BEES revenues are currently annualising (based upon March revenues) at a GMV of USD800m. Earnings We leave our FY22e/FY23e/FY24e EPS broadly unchanged (operational revisions largely offsetting FX pressures (strong USD)). Investment thesis While it is relatively inexpensive, as with the rest of the brewers, we worry about the impact of what looks likely to be a further material step-up in cost pressures at a time when consumer purchasing power will be under pressure. Rating and target price We maintain our Neutral rating; our target price moves from EUR53 to EUR55. 15 questions for management Are we now getting close to a point where BEES and Ze Delivery start to become businesses within their own right as opposed to primarily being avenues to sell your beer brands?
The results posted a significant beat and the tone was reassuring regarding forward volumes. A positive read-across for the brewers. We reaffirm our positive view on the stock.
AB INBEV - BUY TOP PICKS | EUR65 Q1 revenue growth of 11.1% - full year outlook confirmed Q1 revenue growth of 11.1% and EBITDA growth of 7.4% Brazil revenues grew strongly but there was expected weakness in both the US and China Outlook confirmed – revenue growth ahead of EBITDA growth of between 4 and 8%
AB INBEV - BUY TOP PICKS | EUR65 Divesting its stake in the Russian JV with Anadolu Efes AB InBev announced this morning that it is looking to divest its Russian exposure
Management appear to be confident about the year so far. Worries about a soft start in the US (32% of group EBITDA) were downplayed as these were mainly attributed to temporary disruptions (i.e. cold weather, Omicron impact). The US portfolio is more exposed to higher growth segments than it has been historically, and the on-trade channel is growing strongly. The recent Superbowl event exceeded expectations. The company’s rapid shift to digital is delivering myriad benefits. The main benefit is gaining better knowledge about the behaviour patterns of its customers and consumers. We believe this can deliver stronger top-line performance for the group over the medium-term. Brazil is currently under-earning after three years of punishing inflation and taxes, during which EBITDA margins have collapsed by 1,300bps and absolute EBITDA in USD terms has shrunk by 33%. When inflation eventually abates, there should be significant operating leverage in the business, and management confirmed there is no structural reason why margins there cannot return to previous levels over time. Turning to the valuation, the implied FY22E PE on the business excluding Ambev (22% of ABI market cap, currently on 19.7x) and Budweiser Brewing Co APAC (28% of ABI market cap, currently on 36.6x) is just 10.2x. Considering that the ‘rest of ABI’ includes strong positions in the US (mature but high margin), Colombia, Mexico, South Africa, and Europe, this valuation appears unusually low for a Beer company. Our DCF fair value is over €88/sh. We stick with our unchanged €70/sh TP, which implies a FY22E PE of 23.5x (19.5x on the ‘rest of ABI’) and EV/EBITDA of 12.2x. We assume a flat DPS in € terms in 2022E, but believe it could begin to rebuild from 2023E.
Summary of Q421 results Q4 LFL sales growth at +12.1% was ahead of co. consensus (+8.5%), principally due to higher revenue/hl (+8.1% vs. co. cons. at +5.2%). Revenue/hl in both EMEA and South America came materially ahead of co. consensus expectations. Turning towards the bottom-line, LFL EBITDA growth at +5.0% was 100bp ahead of co. consensus, EBITDA at USD4,882m was c.1.6% ahead of co. consensus and underlying EPS at USD0.74 was c.3.4% ahead of co. consensus. DPS at EUR0.50 was in-line with co. consensus and in keeping with last year''s payment. News We highlight that ABInBev''s headline ND/EBITDA is now below 4x for the first time since the acquisition of SAB Miller in 2016. Earnings We revise our FY22e/FY23e/FY24e EPS by c.+1-2%. Investment thesis While ABInBev is making good progress, given the size of the business and the dominance of some of its positions, we believe that navigating through the changes that we are seeing in the beer industry may be more challenging for ABInBev than some of its peers. Rating and target price We maintain our Neutral rating; our target price moves from EUR60 to EUR62. 15 questions for management You appear to be implicitly guiding that FY22 will be the 4th consecutive year of organic EBITDA margin contraction; when do you expect margins will start to increase?
º Figures ahead of consensus Operating profit still below 2019 but revenues ahead Healthy 2022 guidance Q4 does show already great price/mix compensating for increased input costs AB InBev Top pick
Consumer, Brands & Retail Q1 2022 Top Picks: AB Inbev, adidas, Carrefour, Delivery Hero, EssilorLuxottica and LVMH Sector view: high market share and pricing power are key Investors will likely agree with us that in the consumer industry, high market share and brand awareness are key as they are very often synonymous with pricing power and outperformance in challenging macro considering the Covid-19 pandemic, as well as higher raw mat and transportation costs. The key differentiating factor supports our choices for the Q1 Top Picks list: they all foster leading brands within their respective businesses/categories. Our favourite stocks for Q1 2022: adidas Group (Buy, TP: EUR335 vs. EUR330): even though it is a contrarian idea at this stage, we believe that ADS will maintain its initial roadmap for 2022 implied in the “Own the Game” strategic plan, with a gradual acceleration throughout the year as supply chain disruptions ease off and the action plan to revitalize momentum in China deliver its results. The sharp correction over the second half of Q4 due the exponential Omicron surge now leads to attractive entry points to play these gradual acceleration in sales and earnings trends in 2022 and 2023. EssilorLuxottica (Buy, TP: EUR195): current profit-takings on stocks with high valuation multiples create appealing entry price points as EL is surely one of the most defensive stock within our universe as it did not cope with supply chain disruptions or inflationary trends. We believe that investors have well-flagged the near-term dilutive impact from the integration of GVNV and would rather focus on the synergy plan that should be unveiled soon. Synergies, efficiency gains and a favorable price-mix will be key margin enhancers going forward. It is worth noting that our TP is currently based on conservative synergy assumptions. LVMH (Buy, TP: EUR835): We add LVMH in our Top Pick list for Q1 22. The reasons are almost the same than for Q4 21: best luxury brands in our universe (with a Must Have in each of its division as Hennessy, Veuve Clicquot, LV, Dior, Bulgari, Tiffany), positive prospects (both top line and profitability), still potential improvement in some businesses in 2022 (Perfumes & Cosmetics, Selective Retail…), share price upside (15%) despite 42% increase in 2021. We prefer LVMH as Richemont and Hermès have enjoyed a better Q4 stock performance (+38% and +28%). Carrefour (Buy, TP: EUR20): We believe Carrefour is definitely an M&A play for 2022. Even in the absence of any formal offer before the French elections in April 2022, rumours will multiply by then and share price should gradually close the gap with the rumoured all-cash EUR23.5/share bid offer being prepared by Auchan in partnership with PE funds. If it is not Auchan, we expect other players to return (i.e. Couche-Tard) or emerge (i.e. other PE funds). Delivery Hero (Buy, TP: EUR177): Delivery Hero has embarked on a refocus since Dec 2021, choosing to preserve the path to profitability rather than the expansion into new large countries in order to reassure shareholders and reduce the risk of a hostile takeover. This new approach should ensure a higher FY 2022 EBITDA than initially feared (i.e. -EUR490m we believe vs. -EUR550m expected by consensus) while ensuring that the breakeven in 2023 is still within reach. AB Inbev (Buy, EUR65): On average the brewer with the highest average market share is AB InBev with about 60%, more than double the 25%-30% range for Heineken and Carlsberg. Hence, we believe that AB InBev is best positioned to further raise prices and name it our top pick. Furthermore, the stock is trading at only 18.6/16.3 2022/23 earnings compared to 24.6/21.0 for Heineken, 21.5/19.2 for Carlsberg and 25.1/22.8 for Royal Unibrew.
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AB INBEV - BUY | EUR65 (+25%) Investor day feedback: a future of more cheers? From in-organic to organic growth Technology driven customer solutions are accelerating growth Back to EVA, higher optimal leverage ratio and organic EBITDA growth of 4 to 8%
ABI grew volumes by 3.4% in Q3 against the toughest quarterly comp of the year. Even so, the US and the Asia Pacific region were held back by one-offs; however, momentum in the US has recently improved, according to management. They confirmed that the business is not suffering from any significant supply chain challenges. The company now has better control over its own growth trajectory, thanks to innovations and digital initiatives. Innovations have contributed 10% of the group’s revenue year to date. Digital continues to be hugely successful for ABI. The B2B BEES platform now has 2.1m monthly average users, implying a penetration rate amongst ABI’s global customers of 35% – and in markets where the product was launched earlier, the platform now accounts for 8590% of net revenue. DTC delivered over $1bn of net revenue in the 9M period, with e-commerce growing over 90% y-o-y. The company now has beer courier services in 10 markets outside of Brazil, where the concept originated. The company’s ability to grasp new growth opportunities is one of the reasons we chose ABI as a top pick for 2021. Our model is updated for the strong Q3, latest FX rates and share price movements. Our EBITDA estimate for FY21E rises by 1%, but a much larger minority interest drag means our underlying basic EPS falls 2% to $2.98. This change has no impact on our investment view, which remains positive. The valuation is attractive, with the shares trading at a 13% discount to the 10-year average EV/EBITDA, and a 32% discount to the pre-SAB peak EV/EBITDA valuation. Management confirmed that the company does not necessarily need to meet the 2x net debt/EBITDA objective before it would consider raising the dividend again.
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Summary of Q321 results A strong quarter for ABInBev with LFL sales growth of +7.9% coming materially ahead of consensus (co. cons: +4.2%) due to a material beat in South America (+24.8% LFL vs. co. cons. at +10.3%). Turning towards the bottom-line, LFL EBITDA growth of +3.0% was 5.3% ahead of co. consensus and absolute EBITDA at USD5,214m was 7.2% ahead of co. consensus. The only fly in the beer (so to speak) was the complete absence of an interim dividend. News We highlight that Altria (owner of 185m ABInBev shares) today commented that selling its investment in ABInBev at this time would not maximise long-term shareholder value, and therefore it currently plans to maintain its investment. Note: Utilising the 30th Sept. share price (USD49), Altria wrote down the carrying value of its ABInBev investment by c.35%. Earnings We revise our FY21e/FY22e/FY23e EPS by c.+3%. Investment thesis While we are not great fans of the beer sector, we are mindful that ABInBev is a relatively highly leveraged re-opening beneficiary. Rating and target price We maintain our Neutral rating and revise our target price from EUR55.5 to EUR58. 15 questions for management Reading through the filings, you do not appear to have offered any comment on what your thoughts are on President Biden''s Executive Order to investigate competition in the alcohol industry. Can you please share your thoughts with us?
AB INBEV (BUY, TP EUR65) | Strong Q3 figures driven by the Americas and Africa
Ahead of the Q3 trading update next Wednesday, we update for estimated catastrophe losses year-to-date, and a much slower earned premium pattern, as highlighted at H1. We forecast smaller absolute catastrophe losses than for peers, reflecting Conduit’s size and diversified business mix, albeit the reported combined ratio is likely to be impacted severely, due to the pattern of premium earned. Beyond 2021, slower premiums earned will impact the expense ratio, while we also take a more conservative view of the medium-term loss ratio, to reflect this year’s volatility, and uncertainty around catastrophe margins. We have left top-line forecasts unchanged – this may be conservative in the context of a better outlook for industry pricing, but we would note that top-line development in H1 lagged expectations. The net impact is that FY21E moves from a small forecast profit to a modest loss, FY22E EPS reduces by 30% and FY23E EPS by 20% on 10% and 8% increases in combined ratios, respectively. NAV per share falls by 2%/6%/8% in FY21E/22E/23E, with dividend forecasts actually up slightly after H1 beat. These cuts mean a reduction in FY22-25E ROTE from 15% to 14% - a material cut, but above our forecasts for Lancashire, and in-line with the best historic industry returns. On an unchanged methodology, with discounts for start-up and the management share, we lower our target TNAV multiple from 1.35x to 1.25x, and our price target from 600p to 540p, equating to 9x FY23E PE versus Bermudian reinsurers on 8-10x. Trading on c.1x FY21E TNAV after conservative cuts today, we continue to see the shares as offering good value and material upside, with a lack of reserving risk versus peers, weighting towards non-catastrophe lines seeing strong pricing, and a robust growth profile.
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Q3 beat on all metrics and FY21 EBITDA guidance upgraded. This publication may be the positive catalyst to drive the share price up (55% upside).
Organic drivers: (i) Unmodelled operating leverage. Our base case models limited future operating leverage (20bps margin expansion to FY23E), versus consensus that models margin dilution. Although following recent deals, more products are manufactured externally, in our view, margin expansion is still likely. Delivery of the historical quantum of operating leverage can drive a high-single digit % FY23 consensus EPS upgrade. (ii) Incremental revenue – pipeline delivery. Pipeline forecasts remain probability weighted. As development assets mature, probability discounts are removed, applying upward pressure on group financials. We see a relatively easy £2.50 per share upside, from pipeline maturation (even ex-the two largest product opportunities). (iii) Incremental revenue – ongoing geographic expansion. Dechra benefits when existing products are launched in new territories. The group’s portfolio is now broader, but geographic opportunities remain. Further geographic expansion can drive faster revenue growth. Inorganic drivers. Dechra’s gearing is now reduced to c.1x, an historical trigger point on material deal-making. Management continue to focus on both internal and external innovation, but now (once again) with sufficient debt firepower to materially accrete financials inorganically. Our scenario analysis suggests double-digit % upside potential on mid-term earnings estimates, from successful completion of debt-based transactions. Valuation not stretched. TP up 10% to 5,700p. We raise our target price to 5,700p, based on our updated DCF analysis (5,678p) and from marking to market animal health peer multiples (in our relative valuation, 5,820p). We see Dechra positioned in one of the best niches of a very attractive sector, with the majority of earnings secured in the premium companion animal arena. Versus similar stocks, to us, the valuation doesn’t look stretched, particularly given the earnings upgrade potential. Buy.
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Punishment does not fit the crime AB InBev (ABI) is our preferred global consumer staples play (together with RKT LN, Buy) on account of its undemanding valuation (FY22E P/E of c. 16.7x) and high exposure to the strong recovery underway in emerging markets. So why the sell-off after H1 results that were only slightly short of expectations? In this note, we analyse ABI in the context of its brewing peers and also compare the investment narratives of the best (L’Oréal, OR, not rated) and worst (ABI) performing consumer stocks since the start of 2020 and analyse the factors that may explain the disparity. Lagging the wider Consumer sector, especially L’Oréal, which delivers identical top-line growth ABI has been the worst performing brewer and consumer staple name since the start of 2020: down 24% in USD vs Carlsberg (CARLB, not rated) +23% and Heineken (HEIA, not rated) +8%. On a forward P/E basis (FY22E), ABI’s 16.7x multiple is well below that of HEIA (24x) and CARLB (22x). This is despite better organic volume and sales growth relative to HEIA during the past five quarters and more resilient profitability; ABI’s trading margin compressed by 14% in FY20A, whereas that of HEIA narrowed by 27%. While the valuation gap between ABI and its brewing peers is hard for us to square, the widening valuation and share price performance between ABI and OR is startling. Since the start of 2020, OR has risen 59% in USD, while ABI has fallen 24%. Since the start of 2006, OR has risen by 496% in USD (excluding dividends), while ABI has risen by 133%. Turning to valuation, we note that ABI traded at a modest discount (13% average on a trailing P/E basis) to OR from the start of 2013 to mid-2016. However, the valuation gap widened steadily from then and approached 50% toward the end of 2019; the average in the period from October 2016 to January 2020 (ratings became distorted after that by Covid-related share price volatility) was 27%. Looking forward, the current FY22E P/E rating of ABI at 16.7x reflects a >60% discount to OR on 42x. ABI’s forward EV/EBITDA multiple of 10.8x (FY21E) represents a similar-sized discount to OR’s 27.7x. Continued overleaf
ABI ABI RECKIT RKT
The Q2 miss of c. 4% at EPS level (c. 1% for the FY) was mainly due to lower margins as a result of SG&A (bonus accruals are higher this year due to the rebounding business) and some slight weakness in the US market after exceptional market share gains last year. Both of these headwinds are expected to ease going forward, though the comps will clearly be tougher in H2 as COVID mainly impacted ABI’s H1 last year. We update our model for the Q2 results, share price impacts on mark to market of hedges and FX moves. Our FY21E ‘underlying’ EPS rises 2.3% to $3.14 and assumes organic EBITDA +11.9% on organic sales +14.6%. Following the +22% organic sales and EBITDA in H1, this implies organic sales +8.4% and organic EBITDA +4.5% in H2 – and we think we are likely to be at the upper end of consensus. ABI remains a top pick in large cap Consumer. We are encouraged by the quick adoption of digital technologies which should deliver superior growth and margins over time, as well as a stickier customer base. The re-opening of the on-trade will continue to benefit the group in the near-term, though we do not expect a return to pre-crisis levels of on-trade revenues immediately. The balance sheet is becoming stronger (net debt/EBITDA improved by 0.4x during just H1) and the new management team are seasoned ABI executives. We leave our €70 TP and Buy rating unchanged. The recent sell-off presents a good buying opportunity into a multi-year margin expansion, debt paydown, and dividend rebuilding story – with M&A the possible cherry on top.
ABI ABI BAG AUTO COA DGE DLG DOM GRG HSX KLR LAM RMV ROR SMIN STAN
Summary of Q221 results Q2 LFL sales at +27.6% was ahead of consensus expectation (+24.1%) driven by strength in South America and the Middle Americas. Turning to profits, headline EBITDA was also modestly (c.+2%) ahead of consensus expectation but this includes a c.5% (USD226m) benefit from Brazilian tax credits. LFL EBITDA growth at +31.0% (which does not include the tax credit) was below consensus expectation at +35.3% with the main driver of the weaker than expected profit growth being North America where LFL EBITDA declined -0.6% in Q2 (cons. +6.8%) due to higher supply chain costs and variable pay accruals. News We highlight that the new CEO''s focus will be to take a customer and consumer centric approach and to invest in accelerating what is working, which includes: category development; premiumisation; health and wellness; beyond beer and the digital transformation. Earnings We revised our FY21e/FY22e/FY23e EPS by -6%, -3% and -3%. Investment thesis While we are not great fans of the beer sector, we are mindful that ABInBev is a relatively highly leveraged re-opening beneficiary. Rating and target price We maintain our Neutral rating. Our target price moves from EUR68 to EUR62 reflecting our estimate revisions and a 1 point reduction in our target EV/EBIT multiple. 15 questions for management If we purely focus upon the beer category, what do you believe the momentum market growth rate of ABInBev would be in a post Covid world?
It seems that investors are really determined not to give ABI a chance. The bottom line was below expectations in the first half of the year, but why is this a real surprise in the current inflationary environment? For our part, we still highlight the improving momentum and the attractive valuation.
AB INBEV - BUY | EUR65 (+12%) Strong second quarter results on easy comps Q2 results ahead of expectations Easy comps Unchanged outlook Key Q2 market highlights
Following the excellent performance in Q1 and incorporating newly clarified guidance (of 8-12% organic EBITDA growth), we upgrade our FY21E EBITDA by 1.5%. Various below-the-line items (interest, tax, minorities) lead to an underlying EPS cut of 8%, though this is practically irrelevant as investors usually focus exclusively on top-line and EBITDA, given the highly variable nature of the other elements of ABI’s P&L. We note management’s comment that the group could return to previous margin levels in due course, with the current cost inflation being recovered with local pricing decisions. The departure of the longstanding CEO Brito signifies that the Board is serious about evolving the narrative as the share price has languished in recent years. The new CEO Michel Doukeris has been with ABI for 25 years, but is seen as a brand builder and digital-savvy – two things Brito, for all his many skills, was not particularly known for. Doukeris has a good track record in China, the US, Brazil and South Korea. ABI was a relative outperformer during Q1, helped by its BEES B2B digital platform. The company took share in the value and core price segments. In the US and Brazil, the #1 and #2 markets, respectively, volumes are now back above pre-crisis levels and healthy growth trends continue. China is also back above the pre-crisis level. The premium price segment is now over 30% of group revenue and grew sales by 28% in Q1. ABI’s Global Brands (Budweiser, Corona, Stella Artois) all grew double digits y-o-y and grew vs. the 2019 level. Beyond Beer still represents a major growth opportunity with the category growing at a 45% sales CAGR to 2024. ABI is rolling out Mike’s Hard Lemonade to more than 20 countries by the end of 2021. The recent introduction of Michelob Ultra hard seltzer in Mexico has been very successful.
Summary of Q121 results As was the case with Carlsberg and Heineken, a strong start to the year for ABInBev with +17.2% LFL sales growth coming materially ahead of consensus (+8.7%), with all regions significantly ahead. Turning towards profits, while LFL EBITDA growth at +14.2% was materially ahead of consensus (+6.6%), the beat was less impressive on a reported basis (EBITDA at USD4.3bn was c.4.3% ahead of consensus). Underlying EPS at USD0.55 was c.2.5% below consensus expectations. News We highlight Carlos Brito will be stepping down as CEO to be replaced by Michel Doukeris (currently President of North America) with effect from 1st July 2021. Earnings We increase our FY21e/FY22e/FY23e EPS by +6%, +3% and +1% respectively, the variance reflecting an increase in the assumed rate of profits recovery during/post Covid-19. Investment thesis While we are not great fans of the beer sector, we believe that ABInBev is a relatively inexpensive reopening beneficiary. Rating and target price We increase our target price from EUR53 to EUR64, the revision reflecting both our revised estimates and (more so) an increase in our target multiple (reflecting recent sub-sector strength and ABInBev being a key reopening beneficiary). 15 questions for management The comparison base for LFL EBITDA over Q2-Q4 is similar that in Q1. Coupling this with the fact that the world is starting to reopen, why do you expect that LFL EBITDA growth will materially slow over the remainder of the year?
Strong Q1 FY21 results that were well ahead of consensus and, finally, the appointment of the new CEO have both to be applauded today. Buy recommendation well deserved, while the group is currently trading at a significant discount vs. European Staples and with a stock price having not already reached its pre-COVID-19 level.
Recent News: Elite Dangerous Odyssey has been announced as launching on PC on 19th May, contributing to FY21 numbers, with the console editions to come in autumn (FY22). Lemnis Gate (the second Foundry release) is launching on PC and console this summer. On April 29th, two new DLC packs for Planet Coaster, Ghostbusters and Studios Pack were released, with the Planet Zoo Southeast Asia pack released at the end of March. Pipeline: the FY21 delays have ensured a strong slate for FY22, which includes the vast majority of Odyssey’s first 12 months, the first in the annual F1 management series, and the as-yet undisclosed world leading IP title. Beyond this, we look forward to the Warhammer title in FY23 alongside the second edition of the F1 title and c.6 Foundry titles contributing to revenue. Our View: we believe the key driver of share price appreciation in the sector continues to be portfolio diversification with FDEV marrying its best-in-class internally developed titles, with the recent addition Frontier Foundry which is set to lead to a step change in the size of the portfolio over the coming years. This excellent management team, with a strong track record in delivery and an impressive pipeline leaves FDEV worthy of a higher multiple in our view, and that’s before the potential earnings upside to come from new releases. Outlook: we recently heard from Sumo CEO Carl Cavers that the only element holding back the release of new gaming content to market is the industry’s capacity to deliver. Whilst positive for Sumo, this is also a clear boost to FDEV in terms of the demand for new titles. Valuation: we make no changes for this update and continue to value the company on an FY23e EV/Sales multiple of 8.5x. The next scheduled announcement for FDEV is its FY results in September.
ABI ABI FDEV HYVE INF IOM MNDI MGAM NXT OSB REL WOSG SDRYN
AB INBEV - BUY vs. SELL | EUR65 VS. 49(+11%) Cheers to a solid start of the year Q1 well ahead of consensus Beat across the board Back with a concrete outlook Change in recommendation to Buy CEO Carlos Brito to be replaced
A key investor focus: Brazilian COGS inflation A key point of investor focus during ABInBev''s recent FY20 results was Ambev guiding to FY21 cash COGS/hl inflation in the low 20%''s for the Brazilian beer business. The purpose of this report is to contextualise this issue. The historical profits performance of Brazil has been very weak Over recent years, the operational performance of ABInBev in Brazil has been very weak. Over the past 5 years, underlying EBIT (ex. OOI) has declined at a -7% LFL CAGR, underlying EBIT margins (ex. OOI) have reduced by 16.7%-points and underlying EBIT (ex. OOI) in BRL is now lower than at any point over the last decade. While the macro has obviously played a big role in this, we suspect that the presence of a more meaningful competitor (we make implicit reference to Heineken''s acquisition of Kirin Brazil in 2017) has also had an impact. A clear illustration of why structurally we are not great fans of the beer sector. The 2021 outlook is not promising In FY21, ABInBev will be comping a year in which its Brazilian beer volume growth was the strongest for a decade. As to the macro, the poorest 30% of the population benefited from Covid voucher payments which are unsustainable (the payments have served to drive income inequality to record lows), consumer confidence is low, unemployment is high (c.14%) and the currency has plummeted (BRL/USD is now 31% below its trading level at the start of 2020). Furthermore, it is not just a 2021 issue With the BRL having declined by 11% against the USD since the start of the year, ABInBev''s Brazilian business is likely to face further material cost pressures in 2022. While we reduced our ABInBev earnings with recent FY20 results, we now believe that more caution is warranted. We revise our FY21e/FY22e EBITDA estimates by c.-4% and -6% respectively and now sit c.-2% and c.-3% below consensus.
The market is overly focused on the margin outlook comment, but we see several reasons to be optimistic about the absolute level of sales and EBITDA that ABI can deliver in 2021. These are: 1) as the on-trade re-opens, ABI benefits from higher price/mix and margins in this channel, 2) premiumisation remains a strong trend in Beer, so price increases to offset inflation are feasible, 3) good early momentum in Jan & Feb, with Brazil volumes up c. 10% despite tough comps, 4) the new B2B digital platform allows for better net revenue management and is already a meaningful contributor to the group, and 5) continued rollout into new points of distribution in Mexico during the year. ABI is trading at an EV/EBITDA discount to both Heineken and Carlsberg (both N/R), despite greater scale, higher margins and broader geographic diversification. ABI is also favourably exposed to the resilient US market (c. 30% of sales) and less exposed to the weak W. Europe region (c. 9% of sales). Our DCF reveals a fair value of €76/share. We leave our €63 target unchanged, as we modestly downgrade our numbers; our TP implies FY21E EV/EBITDA of 12x. Our FY21E EBITDA falls 3% to $19,033m (organic +9.7%, with margins -10bps y-o-y) and our FY22E EBITDA falls 1% to $20,604m (organic +8.5%). On our forecasts, net debt/EBITDA should fall to 3.7x by the end of the current year, helped by the $3bn in asset sales already executed earlier this year; we assume the Board will hold the dividend flat at €1.00/share for another year to accelerate debt reduction. For us, ABI remains a top pick in large cap Consumer for 2021. We believe it is well positioned to benefit from both the on-trade re-openings as well as the continued shift to e-commerce. We believe the share price does not take account of the longer term cash generation potential of the business.
ABI ABI BIFF SMDS GAMA HSX IBE IBE NICL PAGE RWA SMS
AB INBEV - SELL | EUR49(-8%) Revenue regaining strength in the last quarter Strong Latam Q4 performance helps top-line On balance 2020 was not that bad Latam top performer in Q4 Outlook 202: warning on margin pressure
Summary of Q420 results While LFL revenues at +4.5% were c.270bp ahead of consensus expectations (driven by South America with LFL sales growth of +17.4% vs. consensus at +10.6%), profits were materially below consensus. Although LFL EBITDA growth at -2.4% was only modestly below consensus (-1.0%), adjusting for the impact of some Brazilian tax credits, we estimate that absolute EBITDA at USD4.6bn was c.-4.5% below consensus expectations. Again adjusting for Brazilian tax credits, we estimate underlying EPS at USD0.65, was c.-16% below consensus expectations. News We highlight that Ambev (ABInBev''s Brazilian subsidiary) is guiding that cash COGs/hl are expected to increase in the low 20%''s in FY21. Earnings We revise our FY21e/FY22e/FY23e EPS estimates by c. -8%/-9%. This reflects the impact of c. -3%/-4% revisions to our EBIT estimates being amplified by financial leverage and below-the-line items. Investment thesis While we are not great fans of the beer sector, we believe ABInBev is a relatively inexpensive reopening beneficiary. Rating / target price We maintain our Neutral rating. Our target price moves from EUR62 to EUR57. 15 questions for management You guided that FY21 EBITDA margins will be under pressure. Given that consensus looks for modest margin expansion, should we assume that under pressure means meaningfully down?
A smaller hit to Q4 and FY20 sales expectations, with the performance in H2 quite reassuring. However, the cautious outlook on the FY21 margin slightly darkens the picture.
We assume c. 20% of the on-trade in the UK will not re-open post lockdown. This compares with the Heineken CEO’s estimate that 10-15% of the on-trade across the European region will close permanently. Given the UK is one of the hardest hit economies in the region, we expect its on-trade to be more severely affected. In time, new formats and locations may open, but this will probably happen over several years. Hopefully C&C will be able to take a greater share of this new smaller pie, but there is likely to be a period of profit shortfall. It is difficult to assess the degree to which restructuring will have been able to relieve the effect of the lockdowns on C&C’s business. Management flagged a restructuring would occur at the interim results in late October, at which point it estimated the business was losing €10m in cash (and €6m+ of EBIT) during every month of full lockdown. We assume C&C is able to cut 20% of the workforce (and, by extension, employee costs). We assume (generously) that nearly all other costs besides D&A and employee costs are variable and can fall in-line with sales. We update our model for the c.4 additional months of lockdown in FY21E and the c.3 additional months of lockdown in FY22E, and incorporate our assumed restructuring benefits. This results in our downgrade. Net debt was €372m at the H1 stage (up from €327m at the FY20 year-end). About €55m of excise payments due to the UK government in H1 would have been paid in H2, and there is the ongoing drain on cash from the lockdowns (which restructuring and tight WCR management will not fully offset, we think). Hence we expect net debt will rise to c. €430m at the end of FY21E. The relative valuation to other Europe-listed Brewers, normalised to +24m (STM) profits to account for the different year ends and a ‘normal’ year of earnings, shows the typical 15-25% valuation gap has narrowed.
ABI ABI CCR
Sparkling volumes accelerated in H2 to +4.7% (-4.5% in H1), as the consumer increasingly turned to trusted brands. A key driver of growth in the current environment is multi-packs of single-serve formats in the off-trade channel; these grew 5% in Q3 and accelerated to 13% in Q4. Performance in the Emerging segment, the group’s number one growth driver, continues to demonstrate strong underlying demand. Nigeria grew volumes 13.5% over FY20, with continued momentum in Q4 despite a tougher comparative; all categories grew double-digits in the market, except Water. EBIT margins (-20bps like-for-like) were protected by the €120m of cost savings that management was able to quickly identify and implement during the year. Going forward, CCH expects ‘small’ operating margin expansion in FY21 as cost control will be maintained in the face of rising input costs and FX headwinds, with a return to the longer-term guidance of 20-40bps p.a. once the backdrop normalises. Cash generation was strong over the year, although some of the working capital inflow (+€108m in FY20) was due to the phasing of some payments from customers that should partly reverse in H1 of 2021. Net debt/EBITDA closed the year at 1.5x, at the lower end of the 1.5-2.0x targeted range, and the dividend was raised 3.2%. Looking into FY21, the refinancing of debt at lower rates means finance costs should fall by c. 10%. Management wants to maintain a flexible balance sheet but, if there are no meaningful acquisition targets or major capex investments, special dividends will be considered from time to time. The next bond maturity is in 2024. We note CCH is building its own recycled PET factory in Poland that will help the company reach its packaging targets; another factory is planned for Italy.
ABI ABI CCH RECKIT RKT
In contrast to Heineken’s dramatic reaction to the crisis, with plans to cut nearly 10% of its workforce, ABI demonstrates a model of steady efficiency. ABI management often says ‘efficiency is in our DNA’, and the evidence would support that claim. Its operating expenses as a percentage of sales are consistently 10-15 percentage points lower than Heineken and Carlsberg, and as a result there is no major cost savings plan required to combat the pressures of the crisis. ABI is already both efficient and agile. ABI is also helped by its relatively low exposure to the challenged W. Europe region (c. 9% of sales) and high exposure to the more dynamic US market (c. 30% of sales) compared to peers. Regarding the outlook for W. Europe, Carlsberg cautioned that the on-trade would probably not re-open fully until June, and Heineken expects 10-15% of on-trade establishments across W. Europe will close permanently, with a recovery to 2019 levels not anticipated until 2023. Less exposure to W. Europe is helpful over the medium-term. ABI has capitalised on the growth opportunities of low & no alcohol and seltzers faster than its peers. Low & no is only 6% of beer volumes at Heineken while it is already approaching 10% at ABI. Heineken is only just entering seltzers now, whereas ABI has been involved in the category for over a year. ABI reports FY results on 25th February; consensus expectations are summarised in our full report. Compared to recent FY results from peers, ABI is expected to have performed better than Heineken but worse than Carlsberg. Carlsberg was helped by its uniquely high exposure to China and Russia, where growth is rebounding (in the latter case off of a low level). We expect a more upbeat outlook from ABI than either of its peers delivered. For investors looking for a cyclical recovery play, ABI would seem to fit the bill nicely.
ABI ABI ADM AV/ BEZ CRE CVSG DPH DLG GNS HSX LRE SBRE SAGA
We expect the volume recovery will have stalled in Q4 following the introduction of additional restrictions in many markets in response to the new COVID variants. After organic volumes were +1% in Q3, we now assume Q4 organic volumes will be -0.7%, with price/mix deteriorating again (due to lower margin off-trade channel mix) to -1.9%. Hence we expect Q420E organic sales -2.6% and FY20E organic sales -7.7%. For FY21E, we expect organic volumes to rebound to +6% on easy comps, with price/mix +4% (easy comps and Poland sugar tax effect) and organic sales +10%. Restrictions are likely to last through most of Q1, we think – though this is normally the smallest quarter. The Emerging segment should once again outperform Established and Developing, as there have been less restrictions in the key Emerging markets of Nigeria and Russia during Q4. CCH has continued to take share in Nigeria. Our FY20E EBIT forecast is €609.8m (OM 9.9%, -90bps y-o-y) and our FY21E EBIT is €688.8m (OM 10.6%, +69bps y-o-y). The new tax on sugar in Poland is unlikely to lead to any material impact on EBIT, and the possible disruption from the sugar tax in Italy is now a non-issue for 2021 as implementation has been delayed. We await details of the CFO appointment, as well as any possible strategic update from the recently appointed COO (a newly created position within the group). The pace of further bottling consolidation is uncertain, but the recent CCEP/Coke Amatil deal suggests nothing is impossible – even in the middle of a global pandemic. There are bottling assets in Africa that could be attractive for CCH to own eventually. In the meantime, CCH’s geographic footprint should deliver above sector average growth, and we believe a premium rating is warranted.
ABI ABI CCH DFCH ENOG RECKIT RKT RCDO SQZ
Summary of Q320 results A much stronger than expected Q320 for ABInBev on both the top- and bottom-line. LFL sales growth at +4.0% was meaningfully ahead of consensus (-4.2%) driven by volume growth (+1.9% vs. cons. at -3.9%). Asia Pacific aside, all regions were materially ahead of consensus with South America with +19.5% LFL sales growth (cons. +0.3%) being a particular standout. Turning towards the bottom-line, LFL EBITDA declined by -0.8% (cons: -9.3%) to drive EBITDA of USD4.9bn (+9.9% vs. cons.). In the midst of so much positive news, one notable negative point was the passing of the interim dividend. News With respect to the reported possibility of CEO succession, CEO Carlos Brito commented that he ''will be doing these kind of calls with you for many quarters to come''. Earnings We revise our FY20e by +10% reflecting the stronger than expected Q3 delivery and our read through to Q4. Our FY21e/FY22e EPS is revised by +3/2%. Investment thesis While we believe that the shift to a more balanced top-line model is the right route for ABInBev to pursue, we believe that the transition may be more lengthy / difficult than the market expects. In addition, given the current environment, we have limited appetite for high financial leverage. Rating / target price We maintain our Underperform rating. Our target price moves from EUR42 to EUR45. 15 questions for management With Carlos Brito seemingly set to stay in the CEO role for many quarters to come, what do you believe lay behind the recent press reports that the Board was considering CEO succession?
Q3 with top and bottom line beats, but the emergence of new restrictions and ABI’s decision to forgo the interim dividend slightly darken the picture.
AB INBEV - SELL | EUR49(+4%) Regaining strength in Q3 The figures are improving Early days, but seemed to have turned the corner in the US Also Brazil pulling its weight Net debt/EBITDA of 4.8x (BG estimate)
Strong momentum. Late stage pipeline momentum mentioned at the interims has improved further in H2, with two contract wins, plus a material five year extension of licence / maintenance with an existing customer that was not forecast or included in previous pipeline analysis. There is some impact to Q4 from the wins, including potential for some one-off licence recognition. However, the bulk of recognition will fall in FY21-FY22 for the two US wins. Strategic progression. Both wins are strategic in the sense that Alfa is a leader in US auto new business and so one (large) contract win builds further upon its strength. Meanwhile, equipment finance is a major US penetration opportunity (broadly, asset finance splits 50:50 auto / equipment) with legacy competitors. Alfa has many equipment finance customers in Europe / ROW, including some specialists (i.e. agriculture), so the latest win with a major US broad-based lessor is encouraging. The extension is a good example of the lock-in power of Alfa’s IP, and we see overall momentum (including the recent Alfa Start US auto go-live) as evidence of a market-leading product set, and the product strategy firing on all cylinders. Q3 trading / outlook. Q3 revenues of £16m are in line with last year and lower than H1, which was expected due to holiday utilisation patterns. Our new forecasts imply a flat Q4-on-Q3 which implies a heavy holiday effect on Q4 utilisation and so could prove conservative. Coverage of FY21E has grown nicely; in March we only expected £3m of FY20E EBIT, and in our view the approach to guidance on out-year forecasts should be seen in this context. Upgraded forecasts. FY20E: revenue £70.2m (prev. £66.9m) +5%, EBIT £15.0m (£10.0m) +50%, EPS 3.7p (2.4p) +54%, FY21E: revenue £67.2m (£63.5m) +6%, EBIT £10.1m (£7.5m) +35%, EPS 2.3p (1.7p) +35%. View. Our TP increases to 150p (6x FY20E revenue) and we reiterate our Buy; Alfa is demonstrating some of the strongest momentum in our coverage universe.
ABI ABI ALFA HFG LLOY RSG STAN
ESG is already helping to shape large FMCG companies’ strategies. Danone’s acquisition of WhiteWave, RB’s acquisition of Mead Johnson and Unilever’s acquisition of Seventh Generation are all examples of ESG-driven portfolio decisions. In addition to M&A, ESG influences marketing messages, product formulations, packaging, capex and many other areas. For example, Unilever created the Love Beauty & Planet and Love Home & Planet brands to address the lack of a large-scale, multi-category sustainable living brand in HPC, and the company has also committed $1bn of investment to remove fossil fuels from its cleaning products. Amazon’s decision to apply “Climate Pledge Friendly” labels to more than 25,000 products on its website, including the major FMCG categories, reflects strong consumer demand for greater transparency about products. The pressure on brands to improve their sustainability credentials is mounting. In company annual reports, the ESG report is frequently placed ahead of the financial report for the year, highlighting its importance to the Board and to shareholders. We look at some of the ESG statistics currently being measured by the companies under our Consumer Goods coverage, to compare how they are each approaching this important evolution. The efforts being made by the companies are admirable, but some companies are further along on this journey than others. Within our coverage, we think Unilever, Diageo, RB and Pernod Ricard have made more effort on ESG initiatives than others. We make no changes to our recommendations or target prices. Strangely, remuneration policies do not yet reflect the importance of ESG. Within our coverage only Diageo, Pernod Ricard, Unilever and Tate & Lyle have a component of management remuneration linked to ESG metrics; despite being a leader in many areas of ESG, Unilever is only incorporating ESG into management remuneration from 2020. We expect this to be more widely adopted across the sector over time, with ESG linked remuneration becoming a must-have. Tobacco faces many specific challenges in an ESG-driven world. Many investors have chosen to exclude the sector altogether, whereas others are prioritising investment in companies that are pushing faster into reduced risk products. Overall, however, the pool of available capital for Tobacco stocks has shrunk. The new Tobacco Transformation Index, published on 21st September, ranks Tobacco stocks by how advanced they are in transforming their strategies to advance harm reduction. This may provide helpful context for investors who want to continue investing in Tobacco for income or other reasons, but who also wish to incorporate ESG into their decision-making process. It is early days, but we expect that the Tobacco companies will evolve their ESG strategies significantly over the medium-term, prompted by investors and governments.
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Our FY20E adj. EBITDA is increased just 1% following the Q2 results, but various below the line items lead our underlying diluted EPS to rise 25%. We expect June was probably flattered by some replenishment orders as the on-trade re-opened in many markets; we continue to assume a very gradual recovery – with revenue reaching 2019 levels only in FY22E. ABI’s brand portfolio has performed relatively well during the crisis, with share gains in Mexico, Brazil, China and across most markets in Europe. In the US, market share was flat after many years of share losses. The crisis has prompted the company to become more agile, a trait many have feared it lacked after significant M&A. Performance has particularly improved in the area of digital, and especially e-commerce, where consumers are swiftly embracing the convenience of ordering Beer online; more investment will be spent on this area going forward. In Mexico, ABI was able to swiftly roll out a low ABV product classed as food to address the ban on alcohol sales. Net debt/EBITDA was 4.86x at the H1 stage, though cash flow (excluding M&A activity) is normally skewed to H2. Management is focused on debt pay-down and used some of the proceeds from the sale of Australia to reduce its borrowings; the target of 2x net debt/EBITDA remains unchanged. The business now has enough cash on hand to meet its maturing debt obligations through 2024. We keep our target price unchanged at €60. This implies a FY21E PE of 22.2x, in-line with the valuation of its nearest peer, Heineken (NR). ABI is the largest brewer in the world with an unparalleled emerging market footprint; its current good momentum and market share gains support a rating at least in-line with its peers. The DCF fair value using our estimates is currently €71.65. Buy.
Summary of Q220 results Q220 results were materially ahead of consensus expectations at both the top- and bottom-line. To be more specific, Q2 LFL sales at -17.7% were c.530bp better than consensus expectations with South America being the principal driver of the beat (-7.2% vs. consensus at -24.5%). Turning towards the bottom-line, EBITDA at USD3.4bn was c.12% ahead of consensus with LFL EBITDA declining by -34.1% (consensus -36.4%). While mindful that ABInBev is not a stock where investors pay much attention to EPS, underlying basic EPS at USD0.40 was +76% vs. consensus. News Volumes declined by -32.4% in April, -21.4% in May and June experienced +0.7% growth. Earnings We revise our FY20e/FY21e/FY22e EPS by +6%, +9% and +10% respectively. Conscious that the market tends to pay rather more attention to operational profits at ABInBev, we note that our FY20e EBIT is left broadly unchanged and we increase our FY21e and FY22e EBIT by +4% and +5% respectively (we increase our margin assumptions). Investment thesis ABInBev has three attributes that we are eager to avoid in the current environment: a material exposure to out-of-home sales (we estimate that the on-trade accounts for c.36% of sales), high financial leverage and a material exposure to Latin America (the area where we have greatest macro concern). Rating / target price We maintain our Underperform rating. Our target price moves from EUR41 to EUR42. 15 questions for management Can you please shed colour on the stock replenishments influencing the +0.7% June volume?
AB INBEV
A clear step in the right direction with a significant beat in Q2 and a strong month by month recovery. ABI has been the worst-performing beverage stock in Europe this year, with a valuation which now looks cheap. Still strong upside.
The on-trade channel is extremely important to Beverages companies. Depending on the category and geography it can be anywhere from 20% to up to 80% of revenue, and almost always skews to a higher price/litre and margin product (single-serve format vs multi-pack). Revenue from this channel is down 30-40% y-o-y in markets where it has already re-opened for some time, and this pattern is fairly consistent across geographies. The nightlife channel is only delivering about 25% of its normal level of revenue. In the UK, nightclubs are yet to re-open. Early reads on Q2 and H1 results reveal significant operating de-leverage in the Beverages space. Heineken and Pepsi’s North American Beverages division are two high profile names that have experienced major operating de-leverage, with organic EBIT declines of 53% and 37%, respectively, in the latest period. We expect further volatility from their peers in the upcoming reporting season. The off-trade channel is not able to fully replace the lost demand in the on-trade. Consumers are favouring the mainstream brands and buying larger pack sizes, which are lower price/unit. Product innovations are largely being delayed, though there is still scope for successful packaging innovations. Strong data on off-trade Alcohol sales data in the US from Nielsen and NABCA does not accurately reflect the wider off-trade landscape, which is more subdued, according to the companies operating there. Further compounding the pain, Beverages companies are being asked to shoulder much of the working capital cash squeeze. Larger companies are providing temporary working capital to their on-trade customers during the re-openings. And those with a more fragile supplier base, such as wine and cognac producers, will probably need to support the farmers who provide the inputs. If performance continues to be sluggish in the on-trade, there is risk of modest downside to our forecasts for the large cap players. We see the greatest risk to our numbers at ABI, especially in the wake of the Heineken announcement, though we continue to be nervous about Spirits given the relatively long shelf life of the products. In the small mid cap space, where we have amended numbers (AG Barr forecasts remain under review), our “post lockdown” quarter assumptions for Out of Home channels range from -75% to -50% of previous levels. We have been most bearish on Nichols, not because of any worse positioning, but it is the most recent number change and it is becoming increasingly clear there is no rapid recovery.
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For Q2, we expect organic volumes -26.2%, organic sales -25.6% and organic EBITDA -37.1%. Despite significant cuts to SG&A (-23% y-o-y), there will still be operating de-leverage on lower volumes that cannot be offset in such a short time period. Guidance has been withdrawn, and with significant volume moves across ABI’s various markets, we expect a wider than normal consensus range going into the quarter. Most of the focus will be on any comments about trading during Q3 that management can provide on the day. Our Q2 2020E “underlying EPS” (which excludes one-offs & mark to market gains/losses) is now $0.09, while our “normalized EPS” (which excludes one-offs, but includes mark to market gains/losses) is $0.17 (both are down roughly 90% y-o-y). For FY20E, our “underlying EPS” is $2.51 (-31.1% y-o-y) and our “normalized EPS” is $1.90 (-53.9% y-o-y). On the positive side, FX and mark to market on hedges have moved in the right direction. If the shares continue to close the gap to peers and the wider market, there will be further EPS upgrades on the mark to market of hedges linked to the share price. ABI has underperformed its global brewing peers YTD, as concerns about the high leverage against a backdrop of falling demand grew. However, we are now entering a period of re-opening across most of its markets and performance should begin to improve from Q3. The sale of Australia and the dividend cut have helped free up some extra flexibility on the balance sheet and outstanding debt is already being tendered with the proceeds. While the company is not out of the woods yet, and net debt/EBITDA may still rise this year on account of falling EBITDA, we have confidence that ABI will emerge from the crisis with its brands and operations relatively unscathed.
We highlight ABI’s impressive rally (until Friday 5 June) of 72% (USD) vs its 18 March low, but note that it is still the worst-performing consumer staple YTD (-39% until Thursday 11 June). More importantly, the stock is still down 61% compared to its 5yr zenith (July 2016). The peer group (excluding tobacco stocks) is down only 14% compared to individual stock peaks. ABI is clearly the high-beta play in the consumer staples world at present: in the period 1 January 2020 to 18 March 2020, it was by far the worst performer (-59% in USD, Investec Consumer Staples Index -21%); it rallied hardest in the period 18 March to 5 June (+72% in USD, ICSI +26%); it fell hardest this week up until Thursday’s close (-14% in USD, ICSI -1%). Relative strength/weakness in USD has been a key factor, given ABI’s 50% skew to EM with balance sheet leverage to boot. Most of the stock’s weakness can be ascribed to a derating and valuation leakage associated with SAB divestments, but we also show that EBITDA excluding merger benefits has fallen 10% since FY17A and will decline another 18% this year (our estimate). The decline since FY14A (-36%) has been even greater, with EM FX weakness a key factor. Note that we exclude all divested SAB assets (including Carlton & United) in our calculations.
AB INBEV - BUY | EUR60(+56%) Key points from our virtual meeting Encouraging trend in China – life returning to normal New CFO is likely to continue previous hedging policies Digitalisation trend in favour for the larger brewers Australia sale to be executed on 1 June
ABI, like other brewers, is seeing a drastic impact on its business from the COVID-19 crisis. Volumes for the company globally fell 32% in April, with the added pain from selling prices being lower in the off-trade channel. However, Beer is likely to rebound much faster than Spirits, given the shorter shelf life. We cut our FY20E EBITDA by 4% and FY21E EBITDA by 5% given the slightly extended restrictions that governments have confirmed, combined with more draconian measures (banning sale and/or production of alcohol) in some emerging markets. The effect of a lower share price on hedging programmes and lower income from associates leads to cuts to “normalized EPS” of 21% in FY20E and 10% in FY21E. If the shares recover after a long period of underperformance, some of this downgrade would be reversed. Since the crisis, ABI has raised c. $11bn from bond issuances, drawn down $9bn from its RCF and completed the sale of its Australian assets to Asahi for c. $11bn. In FY20E, we estimate the company will be able to reduce its gross debt by nearly $30bn, taking the year-end net debt balance down to $85bn. Despite the uncertainty regarding forecasts, the shares are undoubtedly cheap. Near term, the relative multiples can be influenced dramatically by the phasing of the sales rebound post-crisis and by debt pay down timelines (not to mention the impact of the share price, which was a nearly $2bn hit to profit in Q1), but the DCF valuation is less affected by these matters. Our DCF shows a fair value of €70 after cutting our estimates, approximately 95% above the share price. On an EV/EBITDA basis, ABI is c. 15% below its 10-year average multiple. We can understand why the de-rating has occurred: consensus FY20 EBITDA estimates were cut 26% over the last 6 months at a time when gearing was already high. But the shares have now fallen too far.
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Q1 figures broadly in line with expectations. Like its peers, Q2 is expected to be worse when taking into account that lockdowns are in many markets. The signs of recovery in China are, however, encouraging. No major changes expected in our estimates. While we don’t expect a quick return to normal, we certainly see no real downside potential as long as debt markets are supported by central banks.
We put our forecasts for Greencore under review on 30th March, when the group withdrew guidance from the market. We have no visibility as to when it might reinstate guidance, but we have revised our forecasts albeit on a scenario basis. As we have flagged with other companies, it is highly likely that these early estimates will prove inaccurate, but they do provide an early guide as to how the business might be affected this year and into the next. The trading impact is most keenly felt in the group’s food to go activities. With wide-scale population movement largely absent at present, “on the go” food purchases are much curtailed; meals are largely being consumed at home. As a result, there is some compensating increase in the group’s other convenience categories, but these are smaller in scale and we assume lower margin. Given the current situation, FY20 profit is likely to fall someway short of FY19, and we downgrade our EPS by 35%, vs pre-Covid levels, although the assumptions are unsophisticated and likely to change. However, as movement restrictions are eased, and workforces return, the group’s food to go revenue should start to recover through FY21, although the economic fall-out of the pandemic could have some ongoing impact on employment levels and consumer confidence. We downgrade FY21E EPS by 20%, assuming some ongoing Covid-19 impact into 1H of the group’s new financial year. We set a new target price at 200p which does not put the group on a challenging PER in a sector context. The balance sheet looks sound. Actions taken should mitigate any large-scale cash impact, leaving the business in solid shape to continue to implement the group’s wider strategy.
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AB INBEV - BUY | EUR60(+56%) First picture on Q2: global April volumes down 32% Q1 volumes -9.3%, revenue -5.8%, EBIT -19.7% Global April volumes down 32% Operating leverage in extreme situations – the China example Mitigating actions on costs and liquidity
Crisis impact takes time to appear: Neither the share price or Rightmove management have been slow to recognise how the crisis is affecting the customer base – hence the offer to discount their fees by 75% for four months from April. That said, the impact on customer numbers could be more pronounced, and take longer to manifest, than some expect given the lagged impact of transaction numbers on agent cash flows. Using Knight Frank forecasts of a >35% (versus 2008 at -43%) drop in UK house sales in FY20 as a base assumption, we illustrate a potential scenario for agent industry revenues by month in Figure 2. We assume Rightmove extends the discount to 6 months, and that agent branches fall 10% on average (vs. 2008 -13%). Critical moment: The crisis however represents a critical moment for the longer-term. Zoopla has started to offer certain firms five months’ access for free, without conditions, and a widening of this offer whilst branches are under severe financial pressure (both now and on re-opening) could potentially be the catalyst for greater switching from Rightmove, or somewhat moderated pricing power for them. We assume a 7% rebound in agent branches in FY21E, and show sensitivities to agent numbers and long-term ARPA in figure 5. On the flipside, the strong balance sheet (helped by the suspension of the buyback and dividend) gives Rightmove significant capacity to respond. Risks and opportunities: We cut revenue and EPS by 37% and 41% respectively in FY20E, and by 11% and 13% in FY21E, moving our DCF valuation to c.520p. RMV currently trades at 19x FY21E EBITDA, versus AUTO at 16x – we believe it is hard at this stage to justify a premium given the long-term competitive concerns, and remain at Hold.
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Our estimates depend primarily on how soon government imposed lockdowns are lifted. At this point we expect they will ease in the latter part of Q2, but this could change. Two key markets for ABI, Mexico (8% of sales) and South Africa (6% of sales), have banned the sale and production of alcohol for about a month. ABI trades broadly in-line with its large peers post the downgrade. For Q120E, we expect organic volumes -11%, rev/hl +3%, organic EBITDA 12% and normalized EPS -$0.19. The decline will be driven by Asia, but North America and EMEA should see some signs of deterioration, too. Q1 has a tough comp anyway, excluding COVID-19, as the SAB synergies are no longer coming through. ABI is due to report Q1 on 7th May. For Q220E, we expect organic volumes -20%, rev/hl +1%, organic EBITDA 26% and normalized EPS $0.46. In this quarter, we expect the biggest drags will come from Middle Americas (Mexico), North America and EMEA. Asia volumes will still be negative, we think. Both ABI and Pernod have noted that although citizens have returned to work in China, the on-trade is far from recovered. Restaurants are spacing customers more widely apart (with a limit of 2pp per table in Beijing), and many workers are choosing to eat at home or at their desks. With high inventories in the channel from the Chinese New Year that wasn’t, we think it will take longer than usual for volumes to recover – albeit Beer with its shorter shelf life should recover faster than Spirits. Earlier this week, ABI placed 10.2m treasury shares in the market to satisfy the exchange of the old privately held SAB Zenzele shares, issued by SAB in 2010, into the new broad-based black empowerment programme Zenzele Kabili launched by ABI in 2020, which will be listed on the Johannesburg Stock Exchange. ABI has also recently secured additional funding from its banks.
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It currently remains difficult to gauge the magnitude and longevity of the COVID-19 related downturn. Even in recovery, as in China, uncertainty prevails as to the speed and extent of reactivation and the potential for a second wave impact. That said, our economists broadly expect stabilisation in China in the Q2, followed by a rebound. While timings elsewhere may vary, they generally expect the eye of the downturn in the Q2, with recoveries beginning in the Q3. Their World GDP forecasts are now -0.5% for 2020 (vs. +2.8% last month), with growth of 3.9% in 2021 if (and we mean if) global policy measures gain traction. Our initial attempt to quantify the possible impact of COVID-19 ran three worsening growth and commodity price scenarios, but sadly proved to be overoptimistic, in part because a China-centred story has been overtaken by events to become a global demand and supply risk scenario. However, consistent with conclusions of that note, our commodity price outlook remains: Positive: precious metals. We expect unprecedented monetary and fiscal stimulus and sharply reduced interest rates to provide a solid support for our existing positive recommendation on gold. We continue to favour exposure to palladium and rhodium given significant supply constraints, a tightening regulatory environment and early signs of revival in the Chinese automotive market. Positive: iron ore. Supply constraints in iron ore (notably in South African, India and Iran to date) and a modest recovery in demand for Chinese semi-finished and finished steel are all expected to limit the downside risk to prices from widespread derived demand weakness in other markets. Less positive: coal and base metals. Coal markets remain challenged, with met coal facing the Indian lock-down and thermal coal still severely pressured by abundant supplies of natural gas and prices trading at or near 25-year lows. Base metal prices are unlikely to recover quickly from their rapid descent into their respective industry cost curves, especially given that FX and input costs are still having a negative impact on the level of cost support. With forecast total returns well in excess of the required 10%, all companies under our coverage are now Buys under our recommendation methodology. In determining our key equity picks, however, we have sought meaningful exposure to the most favoured commodities, highest quality assets in terms of scale and margin, proven management, balance sheet capacity to endure a longer-than-expect downturn (should that occur), and the free cash flow to meet existing capital demands, including ongoing dividends, over the next 12 months. To this end, we favour Rio Tinto, BHP Billiton (upgraded from Hold) and Centamin. The more leveraged, but better diversified, Anglo American (also upgraded from Hold) provides exposure to PGMs and compelling value, albeit without the upside yield potential, given ongoing capex demands.
ABI ABI AAL ANTO BHP BATS CCR CEY CNA CCH DGE DRX FXPO GLEN GOOD IBE IBE IMB IWG NG/ PNN RI RI RECKIT RKT RSG RIO RR/ SGE SVT SMWH SSE STEM TATE ULVR UU/ DQ6 CELTF
AB INBEV - BUY | EUR60(+54%) Enough cash in the pocket Net debt EBITDA ratio to remain around 4.5x What next? Enough cash on hand
Previous guidance of organic EBITDA growth of 2 to 5% Corona impact has proven to be more severe We expect a 6% decline in 2020 revenue which is largely in the share price
Upgrades Coca-Cola Hellenic to Buy (from Add), Unilever to Buy (from Add) and Tate & Lyle to Hold (from Sell). Downgrade: Diageo to Sell (from Hold). Estimates could fall significantly for Consumer Goods companies highly exposed to the on-trade, which include Spirits, Brewers and Soft Drinks. Spirits and Brewers derive roughly half of their revenue from the higher margin on-trade, with Soft Drinks slightly less exposed. However, some of these sales will shift to the off-trade as consumers will drink at home – though there will probably be some trading down in this process. Assuming a drastic scenario, we think sales for these companies could fall by 15%; more realistically we think they could fall by 5-10%. We expect the drop in sales and volumes for these products will be temporary, as has been the case in previous crises, and that, longer term, Spirits, Brewers and Soft Drinks offer attractive mid-single digit organic sales growth that should entice investors with longer time horizons. In the more defensive areas, such as Food, HPC and Tobacco, companies may even see a short term boost to growth as households stock up. These companies have outperformed the wider market by 5-20% year-to-date in the UK & Europe. High quality names in the wider Consumer Goods sector have maintained significant valuation premiums. Beiersdorf, L’Oréal, Estee Lauder, Coca-Cola, Pepsi, Colgate, Church & Dwight, P&G, Campari and Remy are still trading on consensus-based CY20 PE’s north of 20x – whereas the average for our coverage is 12.5x. The sell-off in Tobacco is the most surprising to us, given the clearly defensive nature of the product. Governments in Europe have allowed tobacconists to remain open in areas where other shops have closed, in acknowledgment of citizens’ need for access to tobacco and tobacco alternatives. Leverage is a key concern for investors in the current environment, and indeed many Consumer Goods companies are burdened with debt following several years of heavy deal-making. However, even the most levered company, ABI (currently 4.5x net debt/EBITDA), can afford to lose 74% of its cash from operations before it would need to find other sources of cash to make its annual interest payment. ABI has $16bn total liquidity across its revolving credit facility (already fully drawn down) and cash on hand, and has $3bn of debt maturing in 2020. It also is yet to receive the $11bn in proceeds from the sale of its Australian business to Asahi. The second most levered company, BAT (currently 3.5x net debt/EBITDA), would have to lose 84% of its cash from operations before it would not be able to pay its interest out of internally-generated cashflows. These large, multi-national, defensive companies are unlikely to find themselves in a position of needing to raise capital even if coronavirus impacts business significantly. Furthermore, the low interest rate environment should be helpful for re-financing debt across the sector once markets stabilise.
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Spot commodity price scenario. Under a scenario using spot commodity prices and FX rates, the major miners are generally trading at substantial (30-40%) discounts to their spot valuations. The key exception is GLEN, which is currently trading c.20% above its spot valuation. It would not appear, therefore, that the market is simply valuing the companies at spot. Spot scenario with lower iron ore. The spot valuations may be distorted by the resiliently high iron ore price (currently c.US$83/t for 62% Fe fines) which, in our view, reflects an expectation of Chinese stimulus, directed primarily at fixed asset investment as has traditionally been the case. Anglo American’s spot valuation also reflects currently high PGM prices, which are supported by structural supply constraints. If we reduce the iron ore price to US$61/t, together with PGM prices akin to our long-term prices, this then brings most of the miners’ valuations in line with current share prices. Such a scenario would imply an immediate retraction in the iron ore price to slightly below consensus’ long-term (real) price of US$66/t. This would still not, however, resolve the issue of GLEN at spot being worth less than the current share price. Spot scenario with lower iron ore and higher copper. It is possible that the market may also be reflecting a more optimistic future for battery metals than suggested by spot commodity prices. If we therefore increase the copper price to US$3.0/lb (vs US$2.5/lb spot) and the nickel price to US$7.0/lb (vs US$5.5/lb spot), both in line with consensus long-term (real) prices, then GLEN’s valuation finally aligns with the current share price. To keep the other companies aligned at the same time, we have to reduce the iron ore price 12% further, to US$58/t. In summary. With the coronavirus crisis seemingly leaving the market without any comfort in global growth forecasts, it appears to have taken to using spot and/or long-term commodity price forecasts to value the major miners. This goes significantly beyond the scenarios and the potential commodity price outcomes that we presented in a previous note (Coronavirus scenarios already priced in, 21 February). All companies now offer value. Following the sharp pullback in share prices – down 20-25% since first news of coronavirus – all four companies now offer forecast total returns that could command Buy recommendations. This remains the case even under the most severe potential outcome outlined in our previous coronavirus note. That said, our previous analysis suggested RIO and BHP should offer the greatest earnings resilience, on the back of expected Chinese stimulus.
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2020 is shaping up to be a very challenging year for ABI. The outbreak of COVID-19 is affecting consumption in China (c. 9% of sales) and Q120 organic EBITDA is expected to fall 10% as Beer is a relatively high fixed cost industry that is sensitive to sharp volume declines. COGS/hl are still inflationary, albeit less dramatically than in 2019. The macro is weak in many markets. However, comps ease substantially for ABI in H2. We met with management on Friday. Despite the slightly slower-than-expected deleveraging in 2019 – due to cost inflation and macro worsening in H2, mainly – management does not feel under pressure to shed more assets. They are encouraged by trends in the US business, which is edging towards stabilisation after many years. To offset mid-teens COGS inflation in 2019, management took significant costs out during the year; once COGS eventually normalise this could deliver some margin benefits. Even though there are no more SAB synergies, management expects margins to expand over time due to product mix (and, presumably, continued tight cost control). Longer term, we see ABI as a continued consolidator in Beer and adjacent categories. There is more to do in Africa and Asia, and management confirmed again that the recently IPO’d Budweiser APAC is indeed a vehicle to enable M&A in the Asian region. With a market share almost 3x the size of the next largest company, and 57% of sales in the emerging markets, ABI is in a powerful position to capitalise on the ongoing development of the global Beer category. Once the proceeds from Australia come in, net debt should fall to around $84.6bn; annual FCF pre interest & dividend is $12bn+. On a PE basis, ABI is now 6% below its 20-year average; on EV/EBITDA, it is now below 10x, a level it has only (briefly) reached twice in the last 7 years.
AB INBEV - NEUTRAL vs. BUY | EUR63 vs. EUR100 (+2%) Throwing in the towel A more depressing outlook in our model New Fair Value of EUR63
A poor Q4, which strongly missed expectations on EBITDA (-5.5% vs. -1.9% expected). While FY20 guidance (2-5% EBITDA growth) appears soft, we believe that it is actually more reasonable following the H2 FY19 troubles which are likely to be exacerbated by the Coronavirus in the first half. Now trading at a discount to peers, we are just waiting for some visible improvements.
FY19: 4% EPS beat: Group revenue grew 6% organic to £617m (ahead of our £582m) aided by a strong recovery in Offshore Oil and further progress in Tankships. Specialist Technical was flat y-o-y while Marine Support had a more challenging year. Adjusted operating profit was £66.3m, up 7% y-o-y and 2% ahead of our £57.4m estimate. The growth was driven by Offshore Oil being £2.6m ahead of our £11.0m estimate on much stronger revenue and recovered margins y-o-y. Adjusted PBT was £58.5m (INVe £57.4m) and adjusted EPS 92.8p, 3.7% ahead of our 89.4p. 25 years of dividend growth: The full year dividend grows 10% y-o-y to 34.7p and marks the 25th year of dividend increases. Net debt: Net debt was £230m, including IFRS 16 adjustments (pre-IFRS 16 £203m) and including the investment in the second DSV asset made during 2H19. Working capital was impacted by the cyber-attack which impacted the ability to invoice customers and collect cash. We understand this accounts for £5-10m of the £21m WC outflow. Cash conversion was still strong at 99%. PBT forecasts unchanged: We adjust our divisional revenue and margins to reflect the FY19 outturn, but with the end result of unchanged adjusted PBT and EPS in all forecast years. We adjust our net debt to reflect the 2nd DSV investment and IFRS 16 changes, and forecast financial leverage to be 1.4x EBITDA by the end of FY20E. Strategy evolution – June CMD: New CEO Eoghan O’Lionaird is finalising his review of the business and will present his views at a Capital Markets Day in mid-June 2020. Upside risk to forecasts: We see multiple opportunities including: further renewables work, the second DSV contract, further projects wins in Mozambique, and leveraging the multiple digitalisation initiatives.
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AB INBEV - BUY | EUR100(+61%) Corona virus is more than halving Chinese revenues Another quarterly result, another disappointment Corona virus impact and outlook China and USA disappoints but other key markets florish
Q4 slowdown exacerbated by rising costs Q419 organic EBITDA -5.5% is worse than consensus of -1.9%, with organic sales in-line at +2.5% (consensus +2.6%), as costs accelerated in the final quarter. Commodity costs and transactional FX headwinds were the highest they have been for ABI in a decade. As flagged earlier in the year, multiple markets slowed in Q4 which made it harder to recover that cost inflation. FY19 normalized EPS of $4.08 compared to consensus of $4.47, implying a c. 9% miss (underlying EPS also missed by a similar amount, due to the margin contraction and mark to market. Management states (over several pages) that they are not pleased with the results, which were below their expectations, and that actions will be taken to improve performance. The FY20 outlook for 2-5% organic EBITDA growth – which includes the estimated impact of coronavirus – is slightly below consensus of +5.7%, but we believe the market is already expecting consensus to come down further given the company’s exposure to China. In Q120, EBITDA is expected to be down around 10%. Top-line over FY20 is guided to be more balanced between volume & rev/hl (FY19 was more rev/hl weighted), and cost of sales/hl is expected to be up mid-single digits (it was +5.9% in FY19). The conference call is at 2pm UK time, as usual. US remains subdued The US market, ABI’s largest, remains under pressure. In Q4, sales to retailers were flat while sales to wholesalers were 2.6%. Hard seltzer continues to take share from Beer. Other key markets Volumes in China were -6.6% in Q4, with EBITDA +10.1%. The weak volume performance was due to the clampdown on the nightlife channel, while brand mix and cost discipline drove margins. In the first 2 months of Q1, $285m sales and $170m of EBITDA has been lost in China due to the coronavirus outbreak. The Brazilian beer market continues to rebound, but cost inflation caused EBITDA there to fall by 6.3% in Q4. Balance sheet Net debt/EBITDA fell to 4.0x after accounting for the sale of the Australian operations, which was announced last year. The dividend was maintained at €1.80/share.
The Metro Bank story had been built on an ability to grow (cheap) “relationship” customer deposits at pace, so its standalone strategy has de facto been “on hold” ahead of today’s FY19 results. In essence, there is no value in growing finely priced mortgage assets funded by expensive fixed term bonds. In Q4 2019, customer deposits actually grew by £246m (2%) QoQ to £14.5bn, albeit this included a £256m QoQ increase in fixed term deposits. More encouragingly, there was modest (2%) growth in current accounts and a useful £540m (9%) increase in retail savings offsetting further outflows in the retail partnership and commercial segments. Customer loans were (quite deliberately) managed down by a net £210m (1%) QoQ to £14.7bn. Credit costs rose from 5bps in Q3 to 14bps in Q4. The shares “peaked” at 264p in early November following an Evening Standard article published on 1 Nov which suggested that Lloyds Banking Group (Buy) may be contemplating a bid. We would not discount the possibility of a bid from another bank, or private equity, whether for specific loan portfolios or even the entire business, albeit in the context of outstanding regulatory investigations, that might prove more complex. Metro trades on just 0.2x 2019 tNAV which is, we think, a reflection of its significant strategic challenges. For now, we reserve judgement on management’s (we think surprisingly optimistic) new targets, which include a >8.5% statutory ROTE objective by 2024. Recommendation, target price and forecasts all under review. Presentation @ 08:30am, One Southampton Row, London, WC1B 5HA. Dial-in: +44 (0)3333 000 0804 (UK), +1 631 913 1422 (US), Pin: 49156297#.
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Most of the consumption of Diageo’s products in China occurs in the higher margin on-trade channel (banquets, meals out with friends, nightclubs, etc.) and therefore we do not expect a significant “bounce-back” in FY21E. Management expects a gradual recovery to normal levels of consumption by the end of June 2020. Global Travel Retail is expected to take longer to recover. We are concerned that the on-trade in markets outside of Asia could also come under pressure, particularly across Europe. We expect further negative datapoints over the coming weeks, as data providers will soon be releasing the February on-trade sales. Given the valuation remains elevated compared to historic levels, we stay on the sidelines for now. Other companies with meaningful exposure to the on-trade channel in China include Remy, Pernod, ABI (reporting tomorrow), Carlsberg, and Heineken.
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Reserves up again - The company has increased reserves by 277% in 2019, and this has largely been driven by its optimisation work and its Waterflood projects which, combined with bringing other development projects on-stream, has successfully mitigated the decline of its portfolio. We now expect to see an uplift in production from 2020 onwards, driven by multiple conventional projects. We do however highlight that these projects will require additional capital spend and we also see an uptick in our capex forecasts in 2020-23E. Importantly though, IGas is the operator of all potential development projects and this gives it flexibility and control over timeframes and capital commitments, given any movements in oil prices. Production ramp up - IGas’ net production averaged 2,325boepd in 2019, in line with our modelling and 2019 guidance (2.2-2.4kboepd). The company has also set guidance for 2020 at 2.25-2.45kboepd. Going forward, we expect to see an increase in capital spend, which will result in production growth from current rates of c.2.35kboepd to c.2.6kboepd in 2022E. Thereafter, we expect the company to be able to successfully mitigate the natural decline of its portfolio with plenty of projects still in the development hopper. Financials - Importantly, the balance sheet remains robust with the company exiting 2019 with net debt of £6.2m, and this included a one-off refinancing cost. However, the new RBL has reduced the overall cost of debt and provides further flexibility on future investment as IGas looks to continue its investment in its conventional portfolio. Valuation - We refresh numbers for updated guidance and our TP increases to 75p, largely driven by today’s increase in reserves. Catalysts - FY results (March 2020), Ellesmere Port appeal (ongoing).
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While challenges in China and Korea had already been flagged with the disappointing Q3 results, an unusually high number of markets have deteriorated in Q4 as well. These include countries in Middle and South America (Colombia, Peru, Bolivia, Ecuador, Chile), as well as across Africa (Mozambique, South Africa, Nigeria, Tanzania, Uganda). ABI faces the toughest comp of the year in Q4, as Q418 organic EBITDA was +10% after tracking +7% over the first 9M. Combined with weakness in many of its end markets, we now expect EBITDA to decline organically in Q419E. There are pressures on the gross margin from FX transaction headwinds, COGS inflation and product/geography mix. The synergies from SAB are now fully in the base as of last quarter, so the company will be more reliant on cost savings to offset these headwinds going forward. Management has a strong track record in this area, but we think the market will be overly focused on top-line growth given ABI’s exceptional EM footprint (57% of sales). Strategically, ABI is in somewhat of a holding pattern. Net debt/EBITDA will still be 3.7x on our forecasts at the end of FY19E, keeping big deals like Castel off the table for now. Press reports in early January suggesting longstanding CFO, Felipe Dutra, is on the verge of resigning might imply that major expansion in Asia is not imminent. All this being said, we still see good value in ABI shares. Earnings are temporarily depressed due to macro pressures, tough comps, a weak share price and FX headwinds, but the long-term story is one of mid to high single-digit organic EBITDA growth and double-digit EPS & dividend growth as dividend cuts are reversed and debt reduces. We lower our TP to €86, which is based on a CY20E PE of 22x, and maintain our Buy recommendation.
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AB INBEV - BUY | EUR100(+39%) AB InBev launches Everie cannabis tea and soft drinks Launch of cannabis 2.0 AB InBev JV with Tilray launched Everie – CBD infused tea CAD0.9bn Canadian cannabis infused beverages market
AB INBEV - BUY | EUR100(+21%) Model maintenance Lowering organic 2019 EBITDA growth to 3% (from 7%)
Weak Q3 numbers and downgraded guidance for FY EBITDA growth. At both the top- and bottom-line, the group disappointed. The slowdown in the main markets, higher cost of sales and yoy phasing of sales and marketing investments all negatively weighed on the results.
AB INBEV - BUY | EUR100(+21%) Profit warning after weak Q3 Profit warning will lead to downward revisions Weak Q3 topline Weakness across all regions
Yesterday’s profit warning was not a complete surprise after a spate of board departures and long radio silence. The FY19 revenue shortfall (c.£9m) is actually better than our worst-case scenarios, but drops entirely through to the bottom line, plus cost inflation exacerbates the profit downgrade to c.60%. With >1 year of cost covered by net cash, the company can afford to retain staff and take this level of bottom-line pain. This is probably the long-run right thing to do, albeit reflecting that decision-making here is akin to a private growth company. The shares have likely reached the nadir of bad news and poor sentiment, on the basis that: i) the company has warned on both and FY20, including citing macro issues for the first time, ii) there is £4m of licence / maintenance optionality, but this is now incremental, i.e. management is grasping the nettle on removing upside from core numbers, iii) it is hard to envision another spate of boardroom departures to unsettle the market similar to what we have seen in FY19. The shares falling c.17% on a 60% downgrade highlights this bottoming out process, in our view. Given macro weakness has been highlighted, the cyclicality of ODS revenue is a key remaining question to be answered at the interims. Financials are cyclically troughing, with EBIT having dived from >£40m three years ago to single digit millions this year; near-term earnings multiples are somewhat irrelevant at this point. A trough EV/Sales multiple of <3x looks attractive on the assumption that this is the bottom, and our new TP reflects a 5x multiple that we think acceptable for a double-digit growth stock with >20% margins, which is reasonable for this business in more normal times. On this basis, we move from Hold to a Buy; we think the accounting is clean here, the nettle has finally been fully grasped on messaging, and ‘special-situations’ type interest should start to build following interims next week.
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Management raised medium-term guidance at the June 2019 Capital Markets Day. Organic sales growth was increased by 100bps and the operating margin is now expected to expand 20-40bps p.a. beyond 2020. Mindful of increasing health concerns about soft drinks and volatility in emerging markets, our estimates conservatively assume the lower end of the targeted growth range – implying a slowdown of the strong run rate over the last 2 years. CCH has significantly outperformed the global soft drinks market since 2015, despite its exposure to tricky markets (e.g. Nigeria, Russia). Sugar taxes introduced in Ireland and Hungary were absorbed by the consumer, which gives us confidence that CCH could weather further regulation elsewhere. Acquisitions are still likely over the medium-term, just not of the scale of CCBA. CCH will struggle to meet the net debt/EBITDA targets without bolt-on M&A or a further significant return of cash to shareholders. There are many small Water and Juice bolt-ons in its markets, and a long tail of small Coke bottlers that should be consolidated over time. A top 3 Coke bottler by volume, CCH is well positioned to participate in consolidation of the Coke bottler network. Investment view. Our estimates are broadly in-line with consensus, but under a blue sky scenario we estimate EPS could be 24% higher in 2022E; under a grey sky scenario they could be 43% lower. Our DCF shows the shares as fully valued, but our relative valuation analysis suggests further upside; a 3Yr EPS CAGR of 12% is well ahead of the large cap Staples average of 7%. We apply a 21.7x CY20E PE to derive our 3000p target. Next catalyst: Q3 sales (13th Nov).
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Positive surprise in Q2. Despite the tough comp due to last year’s World Cup investments, volume grew 2.1% organically in Q2, with price/mix a healthy 3.8%. EBITDA grew 9.2% on an organic basis, supported by premiumisation. Growth was broad-based across Mexico, Brazil, Europe, South Africa, Nigeria, Australia and Colombia. The high end beers grew revenue by 19.5%, and Global Brands (Budweiser, Stella Artois and Corona) grew by 8.0%. The overall performance was ahead of consensus, and the shares reacted positively on the day (+4.3%). Profit growth should slow in H2, as comps become tougher. Most of the investments last year were made in H1 to support the World Cup; in FY19, the investments will be more evenly spread throughout the year. After 8.8% EBITDA growth in H1, we expect this to moderate to +6.1% in H2. ABI’s share worsened in the US (-55bps in Q2) due to earlier than usual price increases. But, ABI took share in Mexico with the first rollout to OXXO proving successful. Elsewhere, share was flat in Brazil and up in Colombia & China. Investment view. With cash conversion over 100%, ABI’s cash generation is impressive: at $10bn+ in FCF p.a., the company can meet its leverage targets on an organic basis. The sale of Australia and possible partial IPO of the remaining Asian business offer additional financial flexibility, but are not “must do” transactions. ABI has a strong geographic footprint with market-leading positions in most of the top beer profit pools in the world. Nearly 60% of sales are from emerging markets. We are bullish on the long-term growth prospects.
AB-Inbev (ANH) had underperformed its main rival for 20 consecutive quarters in terms of volume growth, until Q2: both companies reported 2.1% organic volume growth. Weak underlying volume growth has long been ANH’s Achilles heel; hopefully, this is a sign of better days ahead. Note that ANH has lower exposure to Europe, where the weather was unhelpful. Heineken continues to enjoy very strong growth in Asia, led by Vietnam and Cambodia. The Chinese joint venture with CRE became effective in April. In South Africa, brand Heineken and cider both grew volumes >10% and total volumes were likewise up >10%. Nigeria, Brazil and Mexico were all strong, but weakness persists in the US.
AB INBEV - BUY | EUR100(+17%) Positive news flow continues Best quarterly volume performance in five years Positives all around except for the US Somebody is in a rush – next target ThaiBev?
Paring back expectations: Incorporating commodity price changes and FX movements, we pare back FY19E adj. EPS by 1.3%. We forecast that the now expected skew in profits to the second half of the year will be more pronounced this year given flagged headwinds to GPN volumes in H119 and the IFRS 17-driven impact on GN margins. For H119E, we forecast adj. EPS of 34.11c on EBITA of €117.5m and revenue of €1.75bn. Numbers skewed to H2: We expect Q119A GPN volume weakness to have continued through Q219E (INVe -8.0%; H119E -12.3%), but conversely believe GN Q119A strength will boost GN H119E volumes (INVe 7.6%). On pricing, we assume dips in H119E for GPN (-2.9%) and GN (-0.5%). Implementation of price increases are reflected in our GN H219E forecast (+5.6%), but we remain cautious on GPN at this stage (INVe -2.7% for H219E) given it has reported negative pricing in H2 in each of the last four years. Undervalued: We understand there is natural investor caution over Glanbia after weak Q119A GPN volume numbers and the expectation that H1 margins are under pressure. However, we believe these have been quantified and are in market expectations such that, on both a peer comparative and DCF basis, the stock is oversold. Glanbia trades at a weighted average 31.4% discount to its peers. Trading at a 10% discount to reflect volume and margin concerns would give a valuation of €19.38. Running revised forecasts into our DCF model derives a value of €19.91 for Glanbia, down from €21.04. Combining both at an equal weighting generates our €19.65 TP, down from €20.90. As this implies a FTR of 38.1%, we reiterate our Buy recommendation.
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Volume, revenue, EBITDA better than expected Organic volumes +2.1% (consensus +1.0%) is the best volume performance in over 5 years for ABI, with organic revenue +6.2% (consensus +5.1%). This is despite the tough comp (World Cup) in the comparable quarter last year – however, a later Easter will have helped Q2 slightly. ABI is also benefiting from the first wave of rollout to the OXXO convenience store chain in Mexico (the largest chain in the country); it is in 4k stores today and will be in all 17k stores by the end of 2022. EBITDA grew 9.4% organically (consensus +6.5%), driven by positive mix and good cost control. ABI has now delivered $3.151bn of the $3.2bn guided synergies from the SAB acquisition. Underlying EPS is $1.16 (consensus $1.10) / normalized EPS (which includes mark to market gain) is $1.25 (consensus $1.18). Premiumisation continues to drive Beer The Global Brands grew revenue 8.0% while the High End Company (ABI’s premium and craft brands) grew revenue nearly 20%. Revenue growth was particularly strong in Mexico, Brazil, China, Europe and the US. The US saw rev/hl growth of 4.2% in Q2, and ABI has delivered 57% of innovation volume in the US Beer category in 2019 to date. In Brazil, rev/hl grew 3.7% in Q2 and ABI took volume share in a Beer category that overall was flat (ABI Beer vols +2.8%). China premiumisation continues to be strong, with rev/hl +6.5%, as Corona and Hoegaarden grew double digits; e-commerce channel sales were up double digits. South Africa, previously a challenge for ABI, grew revenue by high single digits with volume up mid-single digits; ABI estimates it took share of the Alcohol category, but inflationary costs drove EBITDA margin contraction in this market. De-leveraging ongoing Net debt/EBITDA fell only slightly, to 4.58x, from 4.61x at the end of 2018; the company remains committed to reaching a level under 4x by the end 2020. The recently announced $11.3bn sale of the Australia business to Asahi will help with this process.
The market applauded ABI’s Australian divestment ($11.3bn), and rightly so. AB Inbev reacted quickly after it failed to IPO its Asian unit as a way to contract its immense debt ($106bn). It may well be that this shift (i.e. keeping Asia) means potential investments in emerging markets to offset the lacklustre US.
Reducing forecasts: Incorporating H119A numbers into our model along with the implications on margin development and interest costs drives a considerable downward revision to our earnings forecasts (-8.7%, -11.0% and -9.7% for FY19E, FY20E and FY21E, respectively). Last year, downgrades were driven by citral shortages; this year, it is raw material price increases and the lower-margin nature of the Naturex business, which the market had not fully appreciated. It’s those margins again: When Givaudan acquired Naturex, we argued it had paid full price (17.9x forward EBITDA) for a company that had seen EBITDA margins slip to 11.2% in FY14A, before recovering to 15.8% by FY17A. At the time, Givaudan’s FY17A EBITDA margin was 21.6%. The unknown at the time was whether or not Naturex’s margin expansion could continue. Margin pressure since mid-2018 would suggest that progress has not been up to expectations. Behind the curve: We believe it is not a good sign when a company looks to grow earnings through cost-cutting, which we consider is part of the GBS mandate. The fact that another GBS goal would appear to be adapting the business to deal with a larger volume of smaller orders from local and regional players indicate to us that the company is behind the curve relative to peers such as Kerry, who have had such processes in place for a number of years. Overpriced: Givaudan trades at 35.6x FY19E P/E and 22.3x EV/EBITDA, a 24.0% premium to peers. We value Givaudan on a DCF basis. Running the revised forecasts into our model while reducing our terminal EBITA margin to 19.5% from 21% to reflect the impact of Naturex on Group margins generates our new PT of CHF2465. As this implies a FTR of -8.6%, we downgrade to Sell.
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Asahi to buy Carlton & United Breweries for AUD16.0bn ABI announced it has sold its Australian business to Asahi for an enterprise value of AUD16.0bn, or US$11.3bn, following the aborted partial IPO of its Asian operations. The transaction is expected to close in the first quarter of 2020. There is no specific comment on the expected impact on EPS, but give the high margin of Australia, we believe the transaction will be slightly (low single-digit) dilutive. But we think the market will generally take this announcement well, as it helps ABI to deleverage and relieves it of an asset that was widely seen as non-core. A logical move, at the right price The press release indicates Australia was sold for an EV/EBITDA multiple of 14.9x; this compares to 12.1x when SAB bought Fosters in 2011 and is slightly on the high side for developed market beer assets – albeit Carlton & United is the strong #1 in the market by volume and value. ABI says it will uses the proceeds to deleverage. We believe Australia was a low priority market for ABI, as it was a mature beer market, with a challenging retail structure, that had already been squeezed for cash. ABI says it will continue to explore options to list a minority stake of its remaining Asia business (China, Japan, India, South Korea being the main markets left), as it intends to participate in M&A opportunities in the Asian region in the future.
Following the pulled IPO, ABI dusted off the old playbook of asset sales to pay down debt. ABI confirmed it will sell CUB to Asahi for $11.3 billion. The group continues to believe an APAC IPO is viable and the multiple the IPO will fetch ex Australia is undoubtedly higher than the previous offer.
We are upgrading our normalised FY19 EPS estimates by 20% due to mark-to-market (M2M) adjustments for share-based payments, a lower tax rate and changes in FX. We note that our EBITDA, EBIT and cash flow do not change as much as the M2M is non-cash in nature and reflects a 30% rise in the share price in 1Q’19.
On 11th January, Bloomberg reported that AB InBev is considering a potential $5bn IPO for its Asian operations to raise funds and cut the group’s $100bn+ debt. The report cites a potential value of $70bn for the Asian unit. Liberum view: AB InBev’s Asia division accounts for 15% of group sales and 12% of EBITDA. A $70bn valuation equates to c.50% of the group’s current $140bn market cap. This valuation implies 8.2x 2019E sales and 22x 2019E EBITDA, similar to Asian brewers United Breweries (India), SABECO (Vietnam) and Chongqing (China). The IPO may remind investors of the true value of the group and act as a positive catalyst for the shares as analyst must revisit the SOTPs. Within its Asian division, ABI owns the vast majority of the Chinese profit pool driven by its portfolio of premium and super premium brands including Budweiser, Corona and Boxing Cat. It is also the market leader in Australia and South Korea, #2 in India and has operations in Vietnam, Japan and other South and Southeast Asian countries. A listing also gives ABI flexibility to sell down its stake to buy the Castel assets, to pay down debt or to buy its minority partners.
Adverse FX and input cost developments should continue to be more than compensated by structural premiumisation trends. The group’s strong brand portfolio, distribution prowess and low-cost advantage are sources of durable competitive advantages. We lower our estimates due to rising input costs and softer than expected results but see significant upside from here. TP to €93 from €99, BUY.
Group 3Q’18 organic sales grew 4.5%, below consensus seeking 6.2% driven primarily by revenue/hl. Organic normalized EBITDA grew 7.5%, also missing consensus, which expected 9.9%. The results were offset by commodity price inflation. Normalised EPS of $0.82 missed consensus seeking $1.02. If you adjust for the mark-to-market losses and the Argentina hyperinflation accounting, EPS came in at $1.19. Reported profits attributable to equity holders missed expectations by 43%. The difficult quarter and adverse emerging market volatility led to a 50% dividend cut.
In a bid to leave full-year estimates unchanged, management will often cite a higher H2 weighting after a miss at the interims. Conversely, we often see prudence after a strong H1, with analysts reluctant to upgrade numbers. The ‘anchoring’ around the full-year estimates can lead to companies facing either mountains or molehills in H2. Last year, Rotork and Rightmove were identified prior to warning and beating, respectively, (PDF). In this screen we search for further possible ‘warners’ – both positive and negative – focussing on 2018E H2 EPS weightings vs. their five-year median. AB InBev and Spirent Communications face tougher H2s than usual but are rated Buy by Liberum. Conversely, IAG, Publicis and Travis Perkins look well-placed to exceed full-year expectations.
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2Q’18 organic sales grew 4.7%, behind consensus expectations of 5.4% driven by slower than expected growth in North America and EMEA. Normalized EBITDA beat by 1.1% but organic normalized EBITDA growth of 7% was a touch below expectations of 7.2%. As we go down the P&L, we see slight misses which compound on the way down. Normalized EBIT organic growth came in at 6.7% compared to consensus of 7.7%, though the margin of 32.2% was in line. Normalized EPS came in at $1.1 compared to consensus expectations of $1.13, which is a 2.3% miss. No change to guidance.
We reduce our estimates for AB InBev due to the translation effect from the recent softness in the Brazilian real and the Argentinean peso. We are cutting our EPS estimates by 9% for FY18E and FY19E due to this adverse situation. Our CROCE/WACC and DCF valuations are impacted by FX translation. We still like AB InBev's low-cost advantage and unparalleled portfolio of brands with 7 of the 10 most valuable beer brands according to BrandZ. Maintain BUY with a reduced TP of €99 (from €105).
Group 1Q’18 organic sales grew 4.7%, well ahead of consensus on 3.6% driven by better than expected volumes in Mexico, Colombia and Argentina. Organic normalized EBITDA growth of 6.6% beat consensus by 190bps, led by strong synergy capture, a stronger top line and overall better than expected results. Normalised EPS of $0.73 missed consensus on $0.79 primarily due to a mark-to-market loss on derivatives related to Modelo and SAB. There is no change to the 2018 outlook. Reiterate BUY with €105.
Strong Q4 on the back of a rebound in Brazil as well as better performances in China and Colombia. The US remains soft, although improved vs. Q3. As positives, we note a better than expected margin progression. The improvment from quarter to quarter and positive FY18 outlook should be reassuring for shareholders.
Organic sales grew 8.2% in 4Q’17, beating consensus on 5.8% due to continued premiumisation trends, revenue management, and evidence of pricing power. Group 4Q’17 organic volumes grew 1.6%, better than consensus on 1.3% driven by LatAm North and LatAm South. Normalized EBITDA came in at $6,186m vs. $5,985m, a 3.4% beat. Normalised EPS of $1.04 beat consensus on $1.02 by 1.7%. The 2018 outlook statement is bright and suggests ABI is on stronger footing. BUY with a TP of €105.
Q2 update: revenue grew +5% organically (cons. +3.8%), volumes were up 1% (cons. +0.1%) whereas revenue per hl stood at +3.2%. The EBITDA margin was up 238 bp on an organic basis and -110bp on reported figures. Organic revenue growth by region: North America 0% (cons. -0.9%), LatAm West +8.5% (cons. +6.4%), LatAm North -1.8% (cons. +0.7%), LatAm South 35.4% (cons. +27%), EMEA +10% (cons. +6.3%) and Asia Pacific +5.9% (cons. +5%). By the most important markets, the US saw a better quarter with revenues down only 0.2% but the company has been losing market share. In Brazil, revenue declined 3.8% in Q2, with beer volumes down 1.3% (an improvement vs Q1) against market volumes of -2.7%. The margin stood at 39.2% (better than in Q1). Mexico continues to perform ok with revenue up low double-digit. South Africa delivered very good +8.8% sales growth in Q2 with a strong margin progression. Colombia had a better quarter vs. Q1 with revenues up +3.4% and volumes down 1.4%. China had quite a good quarter with revenue up +7.2% with +1% growth in volumes and an EBITDA margin expansion to 35.7%. The group expects to accelerate revenue growth in FY17.
Q1 update: revenue grew by +3.7% organically (cons. +2.8%), volumes were down -0.5% (cons. -0.6%), and revenue per hl stood at +4.3%. On the reported figures, revenue was up by 7%. The EBITDA margin was up by 76bps on an organic basis and flat on the reported figures. Organic revenue growth by region: NorAm -2.1% (cons. -0.1%), LatAm West +3% (cons. +4.5%), LatAm North +2% (cons. +0.4%), LatAm South +27.4% (cons. +16%), EMEA + 4.9% (cons. +4%) and Asia Pacific +8% (cons. +3.5%). By the most important markets, Brazil remains weak (although volumes were up by 3.4%, the EBITDA margin contracted to 38.8%). US volumes were disappointing (down 4.7%) impacted by BudLight, and the EBITDA margin slightly improved. Mexico seemed to be solid (revenue up high-single-digit) with margin expansion. China had a good start to the quarter with positive volumes (+5%) and better revenue per hl (+6%). South Africa seems to running well with stronger pricing and margin expansion on the back of the implementation of Global Brands. In Colombia, volumes were down by almost 8% and the margin contacted due to a VAT increase. The group expects to accelerate revenue growth in FY17 despite the volatile market environment.
FY and Q4 update: In Q4, revenue grew +0.2% organically (cons. +3.1%), volumes were down 3.3% (cons. -0.8%), and revenue per hl stood at +3.9%. The EBITDA margin was down 152bp on an organic basis and -300bp on reported figures (FX headwinds) to 37%. By the most important markets, Brazil remained weak (EBITDA in Q4 was down c.33%), although pricing improved. US volumes were down in line with Q3, however, margins improved. Mexico seems to be solid. China had a weaker quarter on strong comparables but the overall performance seems to be good (market share gains with stronger pricing). Volumes in South Africa declined by 5% in Q4 and the EBITDA contracted. In Colombia, volumes were also down with a margin contraction. For the FY revenue grew +2.4% organically, and volumes were down 2%. Revenue per hl was up +4.5%. On reported figures, sales contracted by 3%. The EBITA margin contracted by 92bp organically on the back of a weak Brazil (EBITDA declined by c.20% in FY16) and was down 190bp on reported figures to 36.8%. The net profit for period is down 42% on the back of FX headwinds as well as higher net finance costs (linked to the acquisition of SABM). The proposed total dividend is €3.6 (in line with last year’s). FY17 outlook: the group expects top-line growth to accelerate. The company also updated its synergies guidance: ABI expects a total $2.8bn in synergies at constant FX from the SABM acquisition ($2.45bn previously),of which $800m was captured in 2016 and another $2.0bn will be delivered in the next 3-4 years.
ABI Q3 update: On an organic basis, revenue grew +2.8% (cons. +3.4%). Volumes were down 0.9% (cons. -1.5%). Revenue per hl stood at 3.8%. On the reported figures, revenue is down 2.3%. The EBITDA margin contracted by 240bp on a reported basis and by 178bp on organic basis (due to Brazil). Organic sales by region: North America -0.3% (cons. +0.7%), Mexico +12% (cons. +8.1%), LatAm North -5% (cons. +3.1%), LatAm South 22.2% (cons. 12.2%), Europe +3.1% (cons. +3%) and Asia 5% (cons. 4.9%). Volumes by region: North America -2.4% (cons. -0.8%), Mexico +9.6% (cons. +5%), LatAm North -4.5% (cons. -4%), LatAm South -1.7% (cons. -7%), Europe -3.2% (cons. +0.3%) and Asia 1.2% (cons. +0%). By most important market, the US performance in Q3 was weak (both STRs and STWs were down by respectively –2.6% and -2.5%, ABI continued also to lose some market share to STRs). Brazil was very weak (volumes down 5.1%, pricing was negative, and there was a huge EBITDA margin deterioration from 50.2% to 37.8%). Mexico seems robust. China delivered good results (volumes +1.6% and 417bp EBITDA margin progression). The group cut its FY guidance for pricing to now be in line with inflation (vs. ahead of inflation) due to a weak Brazil. ABI had expected Brazil to be flat in revenue for the FY, which is no longer the case. The company expects that unfavourable hedges linked to the devaluation of the Brazilian real will impact COGS before easing by mid-FY17.
Q2 update. On an organic basis, revenue grew +4% (cons +5.8%). Volumes were down -1.7% (cons +1%). Revenue per hl stood at 5.9%. On the reported figures, revenue is down -2.2%. The EBITDA margin contracted by 50 bps (due to LatAm). Organic sales by region: North America +2.2% (cons. +1%), Mexico +9.5% (cons. +11%), LatAm North +1.7% (cons. +9.2%), LatAm South 4.1% (cons. +15%), Europe +4.6% (cons. +4%) and Asia 4.1% (cons. +5%). Volumes by region: North America +0.4% (cons. -0.7%), Mexico +7.2% (cons. +8%), LatAm North -4.6% (cons. +1.3%), LatAm South -14.8% (cons. -5%), Europe -0.8% (cons. +1.2%) and Asia –1.7% (cons. +1.2%). Taking the most important markets, the US delivered good results which were an improvement on the Q1 (volumes were practically flat -0.3% with flat STRs and STWs down -0.9%, whereas the EBITDA margin was up +92bp). Mexico recorded another quarter of strong growth (volumes +9.9%, the margin was negatively impacted by the timing of sales and marketing investments). Brazil’s performance was weak and reflects the challenging macro environment (volumes -4.7%, organic EBITDA margin was down 217bp). China’s performance was good given the weak industrial environment (volumes -1.8% vs. market -8%, organic EBITDA margin was up +553bp on the back of premium portfolio). The company amended its FY guidance and now expects Brazilian net revenue to be flat for the FY (mid to high-single-digit previously).
ABI reported its Q1. Volumes were down 1.7% (cons. -0.3%). Organic revenue was up 3.1% (cons. 6.1%). Revenue per hl stood at 4.9%. On reported figures, revenues were down 10% whereas the normalised EBITDA margin contracted by 120bp. Organic volumes by region: Northe America -1.1% (cons. 0.1%), Mexico +13% (cons. +8%), LatAm North -7.3% (cons. -3.5%), LatAm South -5.3% (cons. -2%), Europe +1.8% (cons. +0.5%) and Asia -0.5% (cons. 0%). Taking the most important markets, the US delivered good results (volumes down 1.2% with STRs -0.3% and STWs down -1.2%, whereas the EBITDA margin was up +82bp). Mexico delivered another quarter of solid growth (volumes +13%, however the margin was negatively impacted by the timing of sales and marketing investments). Brazil’s performance reflects the challenging macro environment (volumes -8.5%, organic EBITDA margin was down 96bp). China’s performance was neutral (volumes -1.1% vs. market -4%, organic EBITDA margin up +76bp). The group expects the challenging environment to continue but initiatives which have been put in place should mitigate the impact. Consequently, ABI remains cautiously optimistic about the rest of the year and maintains its guidance.
ABI released its Q4 and FY results. In Q4, total volumes declined 0.7% (cons 0%) whereas revenue grew organically +7% (cons +6.5%). The normalised EBITDA grew +6.6% (cons 6.5%). Revenue per hl grew 7.7%. On reported figures, sales stood at $10.7bn (cons $11.1bn) and normalised EBITDA was at $4.3bn (cons $4.58bn). Q4 organic volumes by region: NorAm -2.9% (cons. -1%), Mexico +11.3% (cons. +5%), LatAm North -2.6% (cons. +1.1%), LatAm South -3.7% (cons. +0.9%), Europe + 2.9% (cons. -3%) and Asia Pacific -0.2 (cons -1%). Q4 organic revenue by region: NorAm -0.6% (cons. 0.2%), Mexico +13.9% (cons. +8%), LatAm North +7.1% (cons +9%), LatAm South -+24.1% (cons. +28.5%), Europe + 8.9% (cons. +3%) and Asia Pacific 11% (cons +4.8%). Taking the most important markets, in Q4, the *US* volumes were down 3.3% (STWs were down 3.3% STRs were down 1.1%) whereas the organic EBITDA margin contracted 246bp (poor quarter). *Mexico* recorded another strong quarter with volumes up +11.3% and a 352bp organic EBITDA margin improvement. In *Brazil*, volumes stood at -3.5% whereas the EBITDA margin was up 34bp (a good performance in a difficult economic context). *China* remained fragile with volumes practically flat (-0.2% vs. -6% for the whole industry, good performance overall). On a FY basis, total volumes were down 0.6%, organic revenue was up +6.3% (-7% on reported figures). The normalised EBITDA margin was up 55bp organically and down 80bp on a reported basis. Proposed interim dividend is €2.00 (€3.60 for the FY vs. €3.00 last year).
ABI released its Q3 update. Revenue grew +7.9% organically (consensus +6.7%) whereas organic volumes were up +1.5% (cons. +0.9%). Revenue per hl grew 6.3%. On reported figures revenue was down by 7.1% due to an adverse FX effect. Total normalised EBITDA margin progressed by 58bp organically and was 10bp down on a reported basis.
ABI reported its Q2 numbers. Sales stood at €11.05bn (consensus at €11.6bn), down by -11.6% yoy (FX at -11.6%). On a constant basis, the revenue grew by 4.1% (cons. at 5.6%).
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